Thursday 16, February 2017 by Matthew Amlôt

Moody's: Rated South African REITs' credit quality to remain robust in 2017

The credit quality of Moody's-rated South African Real Estate Investment Trusts (REITs) will remain robust in 2017 despite the challenging local operating environment, says Moody's Investors Service in a report published today.

"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," says Dion Bate, Vice President, Senior Analyst at Moody's.

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. 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.

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 per cent is the strongest for its rating, followed by Growthpoint's at 33 per cent. 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 two to four years. Liquidity positions are well managed, with good access to equity and debt capital markets.

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