European Property Companies In Good Shape
Major European property companies and Real Estate Investment Trusts have pursued conservative funding strategies in recent years, leaving them with sound balance sheets and good liquidity to face the uncertain property markets of 2008 and beyond, according to Fitch Ratings.
Fitch’s overall view for the ratings in its universe of European property companies is broadly stable, with one main exception, Meinl European Land Ltd (MEL), which is currently on Rating Watch Negative.
The agency’s review of liquidity positions among rated property companies demonstrates that they are well placed to meet short-term debt repayment and capital commitments such as staged payments on developments. Furthermore, such companies do not need to sell assets to create liquidity.
Fitch expects property valuations to continue to decline, particularly secondary stock and as the investment market and funding avenues such as commercial mortgage backed securities (CMBS) are not conducive to distressed valuation evidence. Furthermore, the various property companies and REITs that Fitch rates in Europe are not highly leveraged at this stage in the cycle and continue to have interest coverage ratios of between 1.4x and 3.6x. They can therefore weather a moderate downturn and be able to meet interest payments on a timely basis.
In the current difficult banking environment Fitch believes that lenders and equity investors should be more prepared to back REITs and property companies with prime property assets (in terms of location, specification and tenant covenant), benefiting from regular long-term lease income supported by a tangible asset. In a poor property investment market, rental quality will continue to be a key rating issue.
Fitch says the UK major property companies and REITs have ample committed standby facilities and comfortable liquidity positions. The liquidity available to these companies should allow them to avoid the difficulties currently being faced by certain property unit trusts, which have had to suspend redemptions. It should also mean that they can avoid the prospect of forced sales into uncertain and liquidity-short markets.
Although UK REITs shares are suffering from significant discounts to net asset values, the ‘event risk’ of predator action is not included in credit ratings. For bondholders, change of control protection mechanisms exist for most companies with public bonds.
The report, European Property Company Outlook-Peaking but Well Prepared, is available for purchase.
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