During the financial crisis, listed property funds had to scrabble under the couch cushions to raise debt capital as the banks tightened the purse strings.
Drastic debt cutting measures and multiple equity raisings helped most REITs pull through the worst of the GFC, but now that markets have improved, many REITs are looking for debt funding once again. Where are they getting it, and have the conditions changed?
There are indications that the listed property funds have learnt their lessons from the debt crisis and are diversifying their funding sources.
According to S&P’s report card on debt credit trends on the listed property market which was released earlier this year, REITs that are looking to fund maturing debt in 2012 are now accessing the bond market to provide an alternative source to the banks.
S&P called the move positive for credit quality.
REITs are also issuing their own corporate paper, as well as approaching super funds for debt funding.
The search for alternative sources like bonds and super funds for long-term debt is part of a move to shift the job of the banks from guaranteeing long-term debt to providing funding for the REIT development pipeline, according to S&P REIT credit analyst Craig Parker.
That shift would make the bank funding period less than two years in most cases, a scenario that would probably make both the banks and the property funds happy.
“The sources and the supply of credit has improved dramatically for REITs, and that’s critical because the pain was exacerbated by the fact that they had no alternatives during the GFC, and that’s definitely changed and put the REITs in a much stronger position,” says McGrath.
Although market volatility has temporarily driven the listed property sector all over the place and caused some to fear about the high correlation between the share market and REITs, trusts have had no trouble at all sourcing funding of all kinds.
Property group Stockland raised funding for 10 years in the US bond markets last month.
But REITs that aren’t as big as Stocklands should be careful.
“The banks are more discerning in who they want to lend to, but our portfolio of rated REITs is strong and they will have the support of the banks. If you are a weaker REIT, one that we don’t rate, I’ve heard anecdotally that the banks are trying to reduce their exposure,” Parker says.