Moody’s Investors Service analysts stated yesterday that the credit quality for South African real estate investment trusts (REITs) is expected to "remain stable" over the next 12-18 months, despite high capital costs, weak demand in the office sector, and ongoing challenges in retail.
According to the ratings agency, SA REITs benefit from diversified portfolios, adequate loan-to-value ratios, and substantial unencumbered asset levels.
Moody’s reviewed Growthpoint Properties, Redefine Properties, and Fortress Real Estate Investments, noting that while all three are affected by the weak office sector to varying degrees, this is mitigated by their investments in the more stable industrial, logistics, and retail sectors.
However, Moody’s investment analyst Iker Ballestero Barrutia cautioned that with interest rates high and financial markets volatile, there is a risk of an extended period of tight liquidity for the South African real estate sector, Business Report noted.
Challenges for the sector include low demand in the office market due to depressed corporate demand and structural oversupply, particularly in the Gauteng area, which continues to depress rental prices.
While concerns exist about SA REITs heavily exposed to struggling retailers such as Pick n Pay, Moody’s noted that the retail real estate market in South Africa is beginning to recover.
Budget retailers like Boxer are showing resilience and attracting more foot traffic, offering some relief to retail property developers.
Retailers are slowly recovering as footfall levels improve and industrial and logistics assets remain in high demand, Barrutia said.
SA REITs are also facing high capital costs, which are impacting cash flow generation. This has led to increased debt refinancing, raising borrowing costs.
Consequently, Moody’s expects Growthpoint, Redefine, and Fortress to face tight financing conditions over the next 12 months.
Additionally, power outages are posing significant challenges for the retail property sector.
Ultimately, Moody’s linked the retail real estate sector’s performance directly to South Africa’s macroeconomic conditions.
Demand for retail assets is driven by GDP growth. However, the availability of energy-efficient assets is crucial due to frequent power cuts in the country, the agency stated.
Despite these challenges, there are positive aspects for Growthpoint (Ba2 stable) and Redefine, as they have sufficient liquidity to cover debt maturities over the next 12-18 months.
They are also likely to benefit from a slight improvement in macroeconomic conditions and a reduction in power outages.
The three SA REITs’ robust unencumbered asset levels, adequate loan-to-value ratios, and growing international operations are also seen as supporting their credit quality.
Barrutia noted that Growthpoint and Redefine have enough liquidity to cover debt maturities for the next 12-18 months, while Fortress continues to rely on short-term debt refinancing.
For Fortress, Barrutia highlighted a sizeable investment in the unencumbered shares of NEPI Rockcastle as a source of alternative liquidity.
International diversification, similar to the trend seen in SA banks gaining more income from regional operations, is becoming increasingly important for offsetting muted growth in South Africa.
Of the three, Growthpoint has the largest international exposure, with investments in Australia, the UK, and Europe accounting for 48% of its property value and 36% of gross property income as of December 31, 2023.
Approximately 38% of Redefine’s property value is in Poland, while Fortress’s international operations through investments in NEPI and direct property ownership in central and eastern Europe make up about 35% of its property portfolio.
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