Re­fi­nanc­ing risks

SA prop­erty stocks have R3,7bn debt to set­tle this year

Finweek English Edition - - Companies & Markets - JOAN MULLER

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.’’

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12 FE­BRU­ARY 2009

Kun­dayi Mun­zara

SA prop­erty gear­ing at rel­a­tively low 25%.

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