Whos borrowed the most in listed property sector? Debt levels probed

Rising interest rates throw the spotlight on debt, particularly in the listed real estate sector.

But one expert says the property stocks are not the ones to be concerned about because their debt-to-equity levels are quite modest.

Arie Dekker, Jarden head of research, said gearing among listed property vehicles (LPVs) is at moderate levels. For most, debt is only about 30 per cent of their assets.

That is a level well within covenants, he said. At this level, the LPVs aren’t too exposed to the impact of rising interest rates and any reduction in asset valuations, he says.

Dekker analysed eight listed property companies and a trust to find that Precinct Properties has the most borrowed, at $1.1 billion, while Investore Property is the most conservatively geared with only $337 million borrowed.

Most of the vehicles have a reasonable level of hedging in place to cover the nearer term, he said.

“The outlook for rental growth is also favourable in this environment, boosting the income side – particularly for industrial and prime office properties,” said Dekker.

Demand for assets remained firm and the outlook for asset valuations was also robust.

“Among the eight larger listed property vehicles we cover at Jarden, most have a lot of flexibility in their capital structure settings,” he said.

Stride Property Group was a good example of this: at its half-year result, gearing was above 41 per cent due to them aborting a plan to spin off office assets into a new listed company to be called Fabric Property. Stride raised equity and gearing sits around 30 per cent, he noted.

Similarly, Vital Healthcare’s gearing was at 35 per cent at its last result. “Despite acquisitions since then, an equity raise and December revaluations brings gearing down to 32 per cent.”

Selling assets is also an option for LPVs trying to reduce gearing: Kiwi Property Group is in the process of trying to sell a couple of non-core retail assets to bring its gearing down and fund investment in its build-to-rent project, Dekker noted.

Goodman Property Trust has stood out for its very conservative approach to gearing, which sat below 20 per cent at its most recent result. Committed gearing has increased into the mid-20s following a spate of acquisitions at the end of last year.

“Given the strength of industrial, we do expect to see its gearing come down a bit from these levels on March revaluations,” Dekker said.

However, the environment for the LPVs is changing and gearing does influence their ability to grow.

During the past few years, most of the stocks have benefited from increasing asset values, enabling them to borrow more and grow their asset bases. That free hit is coming to an end, Dekker forecasts.

John Dakin, Goodman chief executive, explained that the trust’s conservative gearing was part of wider global business practice.

“We’ve been running a very low level of debt,” he said. “It goes back to the GFC which was a very difficult time for Goodman on a global basis. We re-set what levels of debt were appropriate for real estate. We’d rather have a lower level of debt and give away a lower return because cycles change. As it turns out, returns were incredibly strong for us in New Zealand and the decisions we’ve made to exit out of the commercial sector and just concentrate solely on industrial.

“It’s been a very strong cycle for all forms of real estate around the world lately.

“But it never stays like that forever. You want to be able to avoid any declines in values. When the rollercoaster comes down the other side, you never know how fast it comes down. You want to be able to take advantage of opportunities in a downturn. If you look at Goodman Group around the world, all of our partnerships would be similar to the New Zealand business and the way it’s run.

“You carry too much debt at the wrong point of the cycle, you lose the ability to determine your own destiny,” Dakin said.

The cost of debt was rising and that would have an effect on real estate.

The trust had been running at around 18 per cent gearing for some years.

“We sold a lot of assets in the last four to five years and that affected the dividends we paid to shareholders so there was a cost. But we were prepared to take that because we knew it was right for the long term. That gearing will increase because we have about $450m of development work in progress.”

He expects that gearing level to be around 25 per cent when projects begin.

“You would expect that rates would ease out but it depends on the growth of rents. We’re seeing upwards of 5 per cent rental growth in the Auckland market’s industrial property.”

In the past 10 years, Goodman had been around 30 to 40 per cent gearing, but the sale of assets had changed that.

“We had a two-part strategy: to sell the assets to reinvest into industrial with dividends dropping and the second part was to reduce debt levels or ratios. We now want to operate a debt-to-asset ratio within the 20 to 30 per cent range, which is probably the most conservative in the listed property vehicle sector in New Zealand,” Dakin said.

Goodman went from complete reliance on banks before the global financial crisis, but most of its debt is not with trading banks. It’s from United States private placements, and wholesale and retail New Zealand bonds.

Most of Goodman’s debt is raised within New Zealand via placements on the NZX. For example, in December it raised $200m in wholesale debt. Interest of 3.6 per cent was offered on the latest bonds.

Wholesale bond placements were mainly bought by institutional investors, Dakin said.

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