Johannesburg, 24 August 2020 – GCR Ratings (“GCR”) has broadened its Commercial Property Sector Risk score base to include selected European territory groupings. Concurrently, GCR has also revised Spain’s Property Risk Score to 7.75, from 8.00 previously, amidst short-term uncertainty in the wake of the COVID-19 pandemic.
The groupings GCR has built into its analysis represent proxies of the exposures of South African funds in GCR’s issuer ratings universe to European commercial real estate. The groupings consist of countries with closely aligned economic fundamentals, monetary systems, policies, and competitiveness (measured by the World Bank’s Ease of Doing Business and the World Economic Forum’s Competitiveness Indices), amongst other factors. Additional parameters include:
- Highly developed Europe*: GCR’s sample is limited to reserve currency territories with diverse, highly evolved economies, typically presenting GDP per capita minima of approximately USD40,000, robust development metrics, high Ease of Doing Business scores, and low inequality indicators.
- Central & Eastern Europe*: GCR’s sample comprises Eurozone countries with strong growth dynamics, positive Ease of Doing Business metrics, GDP per capita comfortably above USD10,000, improving equality indices, and typically stronger sovereign risk profiles versus other Central/Eastern European territories.
- Balkan territories: GCR’s sample consists of geographically designated Balkan territories that typically fall outside reserve currency zone(s), and present robust medium-term growth dynamics, neutral to marginally positive Ease of Doing Business scores, and GDP per capita below USD10,000.
*GCR remains cognisant of the highly diversified nature of real estate fundamentals in the Eurozone in particular, with investors typically treating each segment as a separate and distinct investment class/market. The fragmented sub-classes and nuanced dynamics in each territory translate to highly polarised fundamentals and performance, but also limit contagion risk across the broader sector or region. Accordingly, the regional sector risk scores assigned capture our high-level view of the potential impact of structural factors and economic growth expectations on broader real estate investment and performance sustainability compared to other sectors. Idiosyncratic risks or defensive features of each segment are typically reflected as differentiating factors in portfolio quality assessment(s) of each issuer.
Strong sector fundamentals and flexibility afforded by the region’s typically conservative asset leverage are tempered by global recessionary risks, lately amplified by COVID-19-related pressures. Looking ahead, changes related to Brexit, including potential divergence in regulatory direction, limitations, economic policy and productivity, could impact real estate dynamics in the region. While sustained capital reallocation is unlikely, there could be flux in demand for office space between London and other gateway cities. Further trade and market uncertainty in the wake of COVID-19 may also constrain the development pipeline for logistics and other globalisation-oriented segments until stability ensues.
The region reflects the most pronounced structural decline of property classes exposed to technological disruptions, with retail and traditional office most impacted by evolving consumer and corporate behaviour. That said, the impact on the region’s overall real estate fundamentals is counteracted by strong market fragmentation and upside potential for commercial real estate benefitting from globalisation dynamics and rapid ICT/telecommunications evolution. This is expected to sustain polarised segmental performance, as capital is reallocated to demonstrably defensive segments and sustainable asset classes.
Sound economic growth and property return prospects, as well as upside from the region’s key geographic positioning along Europe’s logistics pipeline are counterbalanced by the higher risk profile of its commercial real estate assets versus more established Eurozone markets. This inherently implies greater risk of international capital flight or speculative market distortions, especially in response to perceptions of weakening economic growth or stronger returns in other markets. The property sector is also deemed to be vulnerable to the risk of a trade-induced slowdown in consumption expenditure beyond 2020 (given the region’s reliance on imports), or adverse supply chain changes between Eastern and Western hemisphere territories.
Robust property dynamics are counterbalanced by the region’s highly speculative investment profile, including the risk of international capital flight, high susceptibility to distortions in regional growth and global productivity, as well as the risk of adverse shifts in the supply chain dynamics between the world’s Eastern and Western hemispheres.
Despite expectations of a fairly quick rebound from the projected 2020 recession, the Spanish property score risk score has been reduced to ‘7.75’ (from ‘8.0’ previously) to reflect potential loss of income and investment deferrals due to trade and travel international restrictions related to the crisis. Beyond this, the market is expected to achieve base income growth through the cycle, supported by positive lease dynamics and reasonably strong access to capital. That said, Spain remains a speculative real estate investment proposition versus its more developed Western European peers. As such, delayed correction of commercial property fundamentals beyond the COVID-19 crisis could see capital reallocation to other sectors or territories.
South Africa Commercial Property Sector Risk Score, ‘6.0’
GCR has placed South African commercial real estate on Negative Trend, to reflect headwinds from elevated liquidity and funding risks that could constrain the financial flexibility of most funds beyond COVID-19 headwinds manifesting in 2020. While easing domestic lockdown restrictions alleviate immediate operating risks, medium-term pressures continue to be driven by deep structural limitations in the local economy, which even a fundamental fiscal policy shift would not effectively reverse in the next 12-18 months. In the interim, the monetary policy intervention bodes positively, albeit access to capital markets is likely to be restricted to highly-rated funds or portfolios closely-held by strong shareholders. This comes as many listed funds are vulnerable to reduced institutional investor support, amidst limited financial flexibility, projections of reduced recoveries for secured creditors, and significant capital market underperformance. The much-needed cash preservation/deleveraging measures adopted by many funds, including short-term profit retention and disinvestments, could inadvertently reduce REITs’ attractiveness to investors over the outlook period. Further details on factors driving the negative trend are contained in GCR Research released on 19 August 2020, which is available at http://gcrresearch.com/reports/house/industry-reports/.
For details on real estate dynamics in the aforementioned territories, as well as pre-existing Namibian and Kenyan property sector risk scores, a cross-jurisdictional publication titled “Corporates: Commercial Property Sector Risk Scores” can be downloaded at https://gcrratings.com/risk-scores/, and updates will be made available as market prospects evolve. Periodic sector research is also available at: http://gcrresearch.com/reports/house/industry-reports/.
GCR’s Sector Risk Assessment for Corporate Entities
The Corporate Sector Risk Score is an aggregation of a) global industry cyclicality b) ease of doing business based on territorial exposures, and c) sector specific dynamics scores, and is intended to provide users with an overview of the major factors that impact GCR’s assessment of the relative risk of each sector.
GCR’s Corporate Sector Risk Scores are assessed on a scale of between 0-13, and are a key factor in determining the operating environment component score for each Issuer. The core of the GCR Ratings Framework is based on GCR’s opinion that an entity’s operating environment largely frames its creditworthiness. As a result, the operating environment analysis anchors the underlying risk score for the GCR ratings criteria. GCR combines elements of the country risk and sector risk analysis, blended for Issuers operating across multiple jurisdictions, to anchor a corporate to its current operating conditions. For more details, please read the related criteria and research listed below.
GCR will periodically publish updated “Commercial Property Sector Risk Scores”, which will supersede this publication. As all of pre-existing property sector risk assessments have been coalesced into a new publication titled “Corporates: Commercial Property Sector Risk Scores, 24 August 2020”, prior standalone jurisdictional publications of Spanish and Namibian scores are superseded by this publication.
|Patricia Zvarayi||Deputy Sector Head: Corporates|
|Patricia@GCRratings.com||+27 11 784 1771|
|Eyal Shevel||Sector Head: Corporates|
|Shevel@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR’s Country Risk Score Report, May 2020|
|GCR’s South Africa Corporate Sector Risk Score Report, July 2020|
|GCR Places South African Commercial Property on Negative Trend as Fragile Economy Continues to Drive High Asset Liquidity and Funding Risk, August 2020|