SA property stocks have R3,7bn debt to settle this year
CAN SOUTH AFRICAN-LISTED property funds still borrow from banks? Or is there the risk that local financial institutions will start calling in commercial property loans, as have some of their counterparts in Britain, the United States and Australia?
A recent Bloomberg report highlighted the danger of British-listed real estate trusts, such as Liberty International (duallisted on the JSE), facing a major capital crunch as Britain’s banks continue to clamp down on lending. The massive drop in commercial property values in Britain over the past 18 months has affected loan-to-value (LTV) ratios, forcing property companies to repay some of their debt to avoid breaching loan agreements with banks.
An analyst at JPMorgan Chase estimates Britain’s six largest property investment trusts (which include Liberty International) needed additional funds of at least £625m (R9bn) by end-March to restore their balance sheets.
Many Australian and USlisted property companies are currently in the same boat, raising questions about the debt exposure of SA’s listed property sector.
Kundayi Munzara, head of Investec Property’s research team, says although there’s limited refinancing risk for SA property stocks the sector won’t escape the global credit crisis entirely unscathed.
Investec Property’s research shows a total of R3,7bn in loans must be settled or refinanced by SA property companies this year. That amounts to around 12% of the sector’s total long-term debt burden of around R30,9bn. (See table.) The bulk of the loans have been issued by Standard Bank, Nedbank and Absa, which effectively control the debt market in the SA listed property sector.
Munzara notes that Hyprop, Ambit, Acucap, Growthpoint and Pangbourne might have the highest levels of refinancing risk, with a relatively high amount of debt to repay or renegotiate this year.
Property companies are currently not in a position to negotiate such favourable terms on new loans, as was the case a year ago. Consequently, Munzara expects overall interest rate expenses for the companies concerned to rise by an average 0,99% in absolute terms. He estimates that will negatively affect distribution growth by around 0,67% this year, bringing growth in income payouts for the SA listed property sector to an average 9,6% this year.
Munzara adds there’s also risk in the fact new loans are likely to be shorter dated with more onerous covenants, such as lower LTVs and higher interest cover ratios. “That ultimately limits expansion plans through debt financing and increases the threshold for acquisition and development deals.”
Says Munzara: “While the local capital markets have not dried up, banks have adopted a more cautious approach to lending. New loan approvals at some major banks now go through the traditional credit process as well as the treasury departments in order to closely assess liquidity positions.’’ Munzara notes one saving grace for SA’s listed property sector: its relatively low levels of gearing or LTV ratios. Gearing for the sector currently sits at an average 25,2%. That compares to LTV ratios of more than 50% for many listed property companies in Britain, the US and Australia.
Frank Berkeley, head of Nedbank Corporate Property Finance, says it’s “very unlikely” SA banks will start calling in loans on commercial property portfolios like some of their international peers. “SA banks don’t have the same liquidity problems. We’re still comfortable with lending to property companies, as we have yet to see a noticeable rise in arrears or a fall in property values.” However, Berkeley confirms the cost of debt will rise. “Loans are still being rolled over or refinanced – but they’re also being re-priced.’’
12 FEBRUARY 2009
SA property gearing at relatively low 25%.