Medium term outlook for property funds still good: S&P

Standard & Poor’s (S&P) has written a report on the beleaguered Australian mortgage asset class, saying the sector is “under siege” following the introduction of the Government bank guarantee, but reinforcing the health of the underlying investments.

S&P said the Federal Government’s bank guarantee “sent shockwaves through the country’s mortgage funds industry”, and joined others in saying the effect of the guarantee on mortgage funds was an “unintended consequence”.

S&P said it rates 17 mortgage fund products accounting for 80 per cent of the funds under management in the sector.

But S&P said while the changes to the redemption processes of these funds represents a deterioration in the terms of the funds, the quality of the assets and the management of the funds “have not altered materially”.

The research house said it was not “appropriate or prudent to place the whole mortgage fund sector ‘on hold’, as other research houses have done, as each manager must be assessed on their own merits.

“This is not a homogenous sector and some funds may be able to effectively manage their liquidity through these challenging conditions,” the report said.

Only three of the mortgage fund products rated by S&P have escaped an ‘on hold’ rating: Equity Trustees, Sandhurst and Latrobe.

The researcher said it is now waiting for further clarification on the conditions associated with the bank guarantee to assess what the short, medium and long-term effects may be on mortgage funds and other funds considered to be bank or term deposit substitutes.

S&P said it is hopeful that “conditional refinements” would be introduced to reduce the pressure for investors to switch out of their existing investments, removing “some of the redemption request flow currently causing dislocation in the mortgage fund sector”.

S&P said it believes the currently less-competitive lending environment provides opportunities for fund managers to achieve better loan conditions and pricing than has been the case over recent years.

“Subject to liquidity restraints, this is expected to enable conventional mortgage funds in particular to position themselves favourably for the next three years and beyond, notwithstanding softening economic conditions and [a] weaker property market, which could impact property valuations and cash flows.”