Research Zeitgeist: REITs Under a Microscope
Real Estate Investment Trusts have been in the spotlight lately, as evidenced by the popularity of a number of Research Recap posts. Rising vacancy rates in apartment buildings and at shopping malls, reduced occupancy at hotels and other factors are all putting pressure on REITs.
In Fitch Ratings‘ view “the clock is ticking for REITs to maintain adequate liquidity.” As commercial real estate fundamentals remain under pressure during the current recession and severe dislocations in the capital markets persist, U.S. equity real estate investment trusts (REITs) continue to face headwinds maintaining adequate liquidity to meet ongoing funding obligations, Fitch says.
Meanwhile Moody’s notes the fundamentals of the US apartment industry have steadily eroded during the last six months. “The outlook for rental demand is more uncertain, and the ability of Real Estate Investment Trusts to withstand the resulting pressure on their ratings is more frequently brought into question.” However, “Peeking forward two to three years, we can foresee potential for a strong recovery for firms that endure this crisis … we could see record numbers of renters looking for apartments in a relatively supply-constrained environment. Of course, until then, fewer jobs mean fewer rent checks.”
In a similar vein, CreditSights believes that most industry-leading REITs “will maintain their investment grade ratings through this upcoming cycle, assuming that the economy does not weaken materially from its current state.”
“While limited in their cash preservation capability due to dividend requirements, REITs tend to maintain their investment grade status as a result of their tangible and relatively liquid assets, comparatively predictable cash flows, and standard financial covenants.”
This could be why Sovereign Wealth Funds are showing increased interest in the US commercial real estate market. According to Deloitte, in the longer term this is likely to include SWFs taking controlling or non-controlling equity investments in real estate developers and real estate operators (including REITs).
This interest in commercial real estate does not, however, mean vistors to Research Recap have taken thier eyes off the residential variety. The top recent post by a mile was based on a Fitch report raising prime RMBS pool loss estimates sharply. A dramatic rise in delinquencies led Fitch to raise its average loss estimates for recent vintage jumbo prime mortgage pools to between 3 and 5 times higher than its previous estimate.
Research Recap Quote of the Week:
Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear. Simon Johnson in The Atlantic
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April 23rd, 2009 at 12:00 pm
[...] with more than 10% price depreciation.” And as reported in our last Zeitgeist, Fitch says REITs are facing headwinds maintaining adequate liquidity to meet ongoing funding [...]