GCR places South African commercial property on Negative Trend as fragile economy continues to drive high asset, liquidity and funding risk
19 August 2020 – GCR Ratings (“GCR”) has placed South African Commercial Property on Negative Trend to reflect its vulnerability to weak consumer and business sentiment amidst expectations of a deep economic contraction and erratic growth beyond COVID-19 restrictions and interventions. A detailed research report is available for download at http://gcrresearch.com/reports/house/industry-reports/.
Key factors informing the Negative Trend include:
GCR’s view that the sector is highly vulnerable to weak consumer and business sentiment, amidst projections of deep economic contraction. GCR expects that structural limitations will continue to constrain broader macroeconomic and property sector-specific fundamentals beyond 2020, translating to a low growth environment over the outlook period.
Key highlights of the research include:
Expectations of subdued performance on the back of evolving consumer behaviour and technology-driven disruptions and will continue to place pressure the financial profiles of portfolios exposed to property segments that are highly vulnerable to weak economic productivity and reduced space requirements, including legacy office, over-traded retail, and traditional industrial assets.
Immediate operating risks are being alleviated by easing lockdown restrictions, but the risk of value erosion in a number of property classes remains elevated due to amplified structural fissures in the domestic economy. These can only be meaningfully addressed by a fundamental fiscal policy shift, but its implementation over the outlook period will be significantly constrained by National Government’s declining financial flexibility.
Dovish domestic monetary policy bodes positively, albeit access to capital markets is likely to be restricted to highly-rated funds or portfolios that are closely-held by strong shareholders. This comes as many listed funds are increasingly vulnerable to reduced institutional investor support, amidst limited financial headroom and rising expectations of reduced recoveries for secured creditors.
In addition, much-needed cash preservation/deleveraging measures adopted, including profit retention and net disinvestments, could crowd-out investors expecting uninterrupted distribution streams, and reduce REITs’ attractiveness to the broader investor base, potentially driving delistings until capital market activity rebounds.
Financial institutions are re-rating their property exposures for higher operating and funding risk assumptions, amidst covenant and other liquidity management constraints, pressure from synthetic debt exposures, as well as declining collateral quality/coverage of secured facilities. Against the backdrop of low disposals and constrained appetite for unsecured notes, GCR expects property funds’ liquidity risk to remain elevated over the next 12 months.
Certain funds still depict defensive characteristics, including counter-cyclical performance, investment in resilient non-conventional property classes, low leverage (typically represented by LTVs managed below 35%), and exposure to international markets expected to have shallow 2020 recessions, rebounding quickly thereafter. Accordingly, GCR continues to monitor the impact of weak domestic property dynamics on each issuer in its REIT ratings universe, and expects to review the ratings by 31 October 2020.
Deputy Sector Head: Corporate Ratings
+27 11 784 1771
Sector Head: Corporate Ratings
+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’s Country Risk Score Report, May 2020
GCR’s South Africa Corporate Sector Risk Score Report, July 2020
GCR Ratings Scales, Symbols & Definitions, May 2019
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