New analysis from Morgan Stanley flags “uncomfortably high” gearing levels for commercial property.
This column has argued that the same forces hitting commercial property in the US will hurt Australian real estate investment trusts, which have been slow to adjust valuations.
His analysis suggests that if cap rates were to mean revert, the value of commercial property assets owned by ASX 100 REITs would fall by between 5 per cent and 19 per cent, depending on the stock and which segments they mainly play in.First, he argues that while the nexus between share price and NTAs does appear to have broken down, the long-run historical relationship is sound; since 2010, REITs have traded on average 0.
But Chan says Mirvac, which could see its gearing range increase from 25 per cent to 30 per cent, would be “right at the top of its 20 per cent to 30 per cent target range, meaning there will be an inability to fund committed capex unless asset sales, or additional equity, is sourced”.
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