10pc hit to book values looms for listed landlords
Heavy weather: pressure is building on listed property portfolios.

10pc hit to book values looms for listed landlords

A fresh round of writedowns is on the cards for ASX-listed landlords, whose portfolios of office towers, shopping malls and warehouses could be cut by 10 per cent in value on average as interest rates ride higher, according to Barrenjoey analysts.

Worst hit will be the owners of major office towers, with their portfolios in line for a 17.5 per cent haircut. B-grade buildings, which are getting left behind in the race for superior office space, could have their valuations slashed by more than one third, while even premium towers could suffer a 7.5 per cent trim to valuations.

More pain is heading for major shopping centre portfolios, too, with values slated to drop by an average of 11 per cent, even after their ASX-listed owners slashed values two years ago during the upheaval in the retail sector wrought by the coronavirus pandemic.

Warehouse values could slip by 2 per cent on average while alternatives – which range from childcare, to land lease estate, build-to-rent and healthcare real estate – could be written down by 5 per cent.

And as the writedowns flow through, real estate investment trusts (REITs) could look to give themselves more breathing room on their balance sheets, by opting to sell anywhere between $5 billion and $10 billion worth of assets, according to Barrenjoey.

While REITs’ portfolio values – particularly for shopping malls – came under pressure amid the initial pandemic disruption due to concerns for tenant demand, it is a different dynamic driving the looming writedowns.

The key to the next wave is the likely expansion of capitalisation rates, commonly referred to as cap rates and a benchmark metric used in the property sector as a measure of expected yield.

As assumptions about the long-term risk-free rate of return edge up to about 4 per cent, cap rates would also expand in response to expectations for commercial property returns rising to 7-8 per cent, analysts Ben Brayshaw and Diya Goswami wrote in a client note.

The upshot of those movements is that cap rates could rise by 40-100 basis points, to land between 4.5 per cent to 6 per cent for most listed property sectors, in turn prompting the pruning of portfolio valuations.

But there is a silver lining to the cloud of writedowns now hanging over the REIT sector. The Barrenjoey analysts note that rising rental income and strong balance sheets will provide some protection for the listed property stocks.

“We believe that inflation-linked income growth, tight supply/demand across most sectors and moderate leverage will limit the correction,” they wrote.

“Balance sheets can absorb the decline in book values and interest coverage, although some asset divestments may be needed.”

Income from funds management and development and the rate of office occupancy are all revised down in the Barrenjoey scenario. But the modelling also assumes stronger income growth from logistics, convenience retail and self-storage assets.

The analysis canvasses the potential benefits for Westfield owner Scentre that would flow from divesting $2-$5 billion worth of malls and for Dexus if it sold off $1.25-$2 billion worth of assets.

Commercial property investors note that the market is afflicted by illiquidity as buyers and sellers cannot agree on where the real valuations lie.