Investors in the country’s top real estate investment trusts should prepare for lower earnings and distributions across the $140 billion sector as theThe weighted average cost of debt for the major REITs could rise to somewhere between 4 and 5 per cent by financial year 2024-25, compared to about 3 per cent at present, the analysis indicates, which excludes the lowly geared giant of the sector, Goodman.
The REITs that are more vulnerable to increased borrowing costs include diversified landlord and fund manager GPT, Centuria Industrial REIT, Charter Hall Long WALE REIT, office landlord Dexus and mall owner SCA Property.GPT, which Barrenjoey has downgraded, is particularly exposed to rising rates, given its present low weighted average cost of debt and the relatively low amount of its debt that is hedged.
In the near term, debt costs could overshoot the Barrenjoey assumptions – modelled on a 90-day bank bill swap rate of 3 per cent – and stay at that level. Alternatively, rates could peak for a short time only before the Reserve Bank of Australia begins cutting rates in 2024. While borrowing costs will be closely scrutinised through the coming earnings season, the risk of a broader economic downturn further ahead could increase, some analysts, including Macquarie, have noted.