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Moody's outlook for SA REITs steady

Feb 15 2017 19:06

Cape Town - The credit quality of Moody's-rated South African Real Estate Investment Trusts (REITs) will remain robust in, according to Moody's Investors Service. This despite the challenging local operating environment.

"High quality property portfolios and broad local and offshore commercial property diversification will provide South African REITs that we rate with a buffer against continued low GDP growth in 2017, weak local demand, depressed business and consumer confidence, and in turn a weaker South African commercial property market," said senior analyst Dion Bate.

The rating agency expects the performance of Growthpoint Properties Limited (Growthpoint, Baa2/Aaa.za negative), Redefine Properties Limited (Baa3/Aa2.za stable), Fortress Income Fund Limited (Fortress, Baa3/Aa3.za stable) and Hyprop Investments Limited (Baa3/Aa3.za stable) to remain resilient, thanks to quality properties in prime locations, broad sector/tenant diversification and offshore property exposures.

Moody's expects mid to high single-digit net operating income growth for South African REITs' (Moody's rated) local portfolios in 2017 as they continue to recycle and strengthen their property line-up.

It said that disposing of lower quality properties, refurbishing existing properties and developing new ones will promote tenant retention, maintain positive rental renewal growth and keep vacancy rates low.

Recent international expansion by Moody's rated South African REITs brings positive yields spreads and exposure to higher growth economies with stronger, more stable currencies relative to the South African rand. However, investment in countries with weak credit profiles, such as in Africa, may increase business and operating risks, cauioned Moody's.

Conservative financial profiles mean Moody's rated South African REITs are in a good position to absorb operating pressures and/or debt-funded acquisitions. Fortress' leverage ratio (adjusted gross debt/gross assets) of 24% is the strongest for its rating, followed by Growthpoint's at 33%.

Interest coverage metrics remain at risk of higher funding costs due to sovereign risks but are mostly offset by fixed interest rate hedges for the next 2 to 4 years. Liquidity positions are well managed, with good access to equity and debt capital markets.

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