Landlords face ‘new chapter’ in financing costs
Listed landlords face a “new chapter” when it comes to financing costs, with looming debt maturities for many big names set to dent earnings per share in the coming years.
The equities team at RBC Capital Markets analysed the impact on 2022 earnings per share for 21 UK and Europe-listed companies from refinancing all debt maturities across a range of financing rates, keeping other factors equal. Assuming a refinancing rate of 5%, the team calculated that the impact on EPS by 2030 from debt maturing could range from 0% at Impact Healthcare REIT to 60% at Tritax Eurobox.
“Forward starting swaps suggest UK five-year swap rates will average 3.6% over the next decade, 125 basis points above the 2.4% average over the 10 years from 2012 to 2021,” the team said. “Understandably, investors appear cautious about the ability for landlords’ earnings to absorb a circa 50% increase in central bank rates.”
Listed landlords face a “new chapter” when it comes to financing costs, with looming debt maturities for many big names set to dent earnings per share in the coming years.
The equities team at RBC Capital Markets analysed the impact on 2022 earnings per share for 21 UK and Europe-listed companies from refinancing all debt maturities across a range of financing rates, keeping other factors equal. Assuming a refinancing rate of 5%, the team calculated that the impact on EPS by 2030 from debt maturing could range from 0% at Impact Healthcare REIT to 60% at Tritax Eurobox.
“Forward starting swaps suggest UK five-year swap rates will average 3.6% over the next decade, 125 basis points above the 2.4% average over the 10 years from 2012 to 2021,” the team said. “Understandably, investors appear cautious about the ability for landlords’ earnings to absorb a circa 50% increase in central bank rates.”
It added: “The fact that most listed landlords’ debt is now largely long-dated and fixed/hedged in nature is positive. It means any increase in their financing costs is likely to take time, allowing for a mitigation from any rent growth and/or changes in strategy. However, the delay in the full impact on earnings becoming clear creates uncertainty for investors and thus the risk that they are too pessimistic in our view. The fact that the switch to a higher interest rate environment appears unlikely to be matched by higher economic growth is likely to exacerbate the issue.”
Over the decade to July 2021, refinancing five-year debt saw a decline in landlords’ average in-place financing rates in the UK, RBC said. That was followed by “a big change” in 2022, with five-year swap rates now 290 basis points higher than five years. “Refinancing has clearly switched from being a positive to a considerable negative for EPS trends,” the team said.
The debt of landlords covered by RBC “is now almost entirely fixed or hedged”, the team said. “As such, we believe the main mechanism for higher financing rates feeding through to each landlord’s average in-place cost of debt is when existing debt expires. Funding developments are likely to be significant factor for some landlords.”
As a group, some 56% of their debt matures by the end of 2027 and 80% by the end of 2030. By landlord, the proportion of debt maturing ranges from Tritax BigBox, at which 30% of debt will expire by 2027, to Warehouse REIT at 100%.
Resilient revenue
RBC expects listed real estate to deliver a better share price performance this year after a “significant underperformance” in 2022. Revenue should be resilient, the team said, and “WAULTs vary a lot, but are a strength for all but a few”.
Sheds and beds will remain in focus, and by asset type, RBC said it expects “significant declines in London office market rents, smaller declines for better quality shopping centre/retail park rents, a temporary lull in rent growth for warehouses and strong growth in rents for student housing”.
Pointing to a decade-plus high for office completions in London this year, the team noted that “peaks in the delivery in new supply have an uncanny way of coinciding with periods of weak tenant demand, which 2023 could well be”.
It added: “Negative GDP growth has historically hindered demand and could be particularly telling for a market that has been driven by tenants’ ‘war for talent’ in recent years. Business conditions for technology businesses, a major driver of tenant demand in recent years, appears to have changed in particular.”
On retail, the team said: “A tougher operating environment risks weaker occupier demand for retail space as well as increased risk of tenant failure. Any such deterioration would come against the backdrop of high levels of vacancy, making for an extremely weak potential demand supply dynamic… we continue to believe better-positioned retail stores, in what is a heterogeneous part of the property market, will fare better. However, as seen in recent years, that does not mean such stores are immune to negative trends.”
Slowing supply of industrial space looks set to continue, RBC said, helping to stabilise rents. “We believe that as long as market vacancy rates remain below 5%, further rent growth is likely, and that they would need to be closer to 10% for rents to decline.”
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