Fitch: Aussie REITs office valuations under pressure

Oksana Patron

30 June 2023

A combination of structural changes, which include the rise in flexible working, with higher interest rate environment will put office valuations in the spotlight in Australian real estate investment trusts (REITs) results for the financial year ending in June, according to Fitch Ratings.

The rating agency said that it believed that Australian REIT’s office valuations will continue to be supported by a flight to quality, long-dated weighted-average lease expiries (WALEs) and high-quality tenants, but Fitch also warned that the arrival of a new supply and overall sector weaknesses had led to increased incentives on renewed leases.

“This, and higher interest rates, may contribute to potentially significant valuation declines in FY23,” the agency said.

According to Fitch, access to funding will continue in the short term due to REITs’ conservative financial profiles and discipline in maintaining buffers to covenant gearing levels, but at the same time it expected increased gearing for all REITs with office exposure.

The agency said that a lot will depend on how REITs would respond to the structural changes.

“The REITs’ response to the structural changes will be important for them to retain strong access to capital markets for refinancing and their robust credit profiles. This includes demonstrating flexibility around development pipelines and a continued commitment to keeping their financial profiles conservative.

At the same time, REITs with well-diversified and high-quality retail portfolios will be able to shield themselves from pressure even when consumer sentiment weakens.

Fitch also said that it believed demand for industrial space, due to limited supply, will continue to support strong market rent increases across the sector.

“We expect Australian REITs to increasingly benefit from higher rents as development pipelines complete and leases expire.”