Moody’s has downgraded global real estate from “stable” to “negative” as it predicts mounting risks over the next 18 months.
The ratings firm said office and retail property would face the greatest risks, as the persistence of hybrid working continues to drag down offices and a fall in discretionary spending hits retail tenants.
It added that predicted rental growth of 1% to 3%, which would normally result in a stable outlook, “will not be sufficient to offset the negative impact of higher interest rates on the sector”.
Moody’s said REITs and REOCs in Europe, which represent about 16% of its global rated universe, were attempting to reduce costs and cut capital spending amid the difficult operating environment.
About 22% of rated companies have announced changes to dividend payout ratios, while only 12% have raised equity as companies shy away from diluting shareholders when they are trading at material discounts to their net tangible assets.
As a result, it said: “Companies will inevitably face higher marginal refinancing costs, which will not be fully compensated by rental growth.”
It also warned of a widening gap between best-in-class and the rest, with “a more pronounced credit bifurcation between prime and secondary property portfolios”.
Moody’s did allow one small silver lining, saying it would change the outlook to stable if rental growth remains between 1% and 3%, “while capital markets and commercial real estate investment volumes improve and support stable asset pricing across sectors”. However, it added that this was not likely to happen.
Earlier this week, Moody’s downgraded Canary Wharf Group from Ba1 to Ba3, predicting it would have refinance the estate or resort to asset sales to pay the £1.4bn debt due over the next two years.
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