Moody’s maintains stable outlook for Australian REIT segment

SYDNEY: Moody’s Investors Service is maintaining its stable outlook for the Australian real estate investment trust (A-REIT) sector, in view of expectations for a continued gradual recovery in its fundamentals.

In a statement on March 31, Moody’s vice-president and senior analyst, Maurice O’Connell said key macro-economic variables and tightening supply of certain key markets in Australia would support sector performance over the next 12 to 18 months.

“We expect asset valuations recovery to gather momentum over the period. The favourable macroeconomic environment will impact rental and vacancy rates, particularly in markets with tight supply such as the Sydney office market," he said.

Moody’s expects rent incentives to resume a gradual improving trend over the next 12 to 18 months, albeit some markets such as the Brisbane office segment will likely lag as it works through additional supply.

"At the same time, the balance sheet de-leveraging evident over the past two years has enhanced the sector's capacity to absorb further shocks" added O'Connell.

Notwithstanding the stable outlook, the sector faces two key issues. The first is its unbalanced debt maturity profiles, with lumpy debt maturities and mismatches between short-term debt and long-term assets.
"This feature is a perennial credit concern for the sector. Moody's acknowledges the focus of many rated A-REITs on diversifying and lengthening their debt maturity profile," he said.

O’Connell said the second issue is the extent to which the de-leveraging over the past two years represents a structural shift, rather than a temporary response to cyclical challenges.

“We will closely monitor whether material acquisitions, leveraging into developments and possible shareholder-friendly initiatives could undo the benefits of the recent de-leveraging, leading in turn to pressure on credit profiles," said O'Connell.

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