Investors in European real estate companies have taken “too cautious” a view on the likelihood of financial distress for the sector, according to RBC Europe analyst Julian Livingston-Booth.
“European real estate share prices appear to be putting some probability on balance sheet restructuring being required in our view,” Livingston-Booth said in a note this week. “Overall, we believe this is too cautious, with 50% property revaluation headroom to debt covenants on average for our coverage.
“Factoring in the more-negative-than-consensus property revaluations we forecast, we estimate headroom still remains significant at 42% on average. For those landlords with more limited headroom, various other factors need consideration. The benefit to covenant headroom from forgoing dividends is generally not enough to make it likely in our view.”
Livingston-Booth said landlords covered by his team typically have a variety of debt covenants across different facilities.
“We estimate the headroom in property revaluations to the tightest covenants of significance averages 50% based on March and June valuations,” he added. “We estimate net initial yields would need to increase 4.9 ppts on average for covenants breaches.”
The 13% negative property revaluation forecasted by the team would see headroom to debt covenants fall to 42% on average, he said, “suggesting little risk of landlords in general being forced into large scale dilutive restructurings”.
To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews
