In the depths of the pandemic, Scentre turned to hybrid capital to protect its balance sheet. Now, some argue office landlords should follow its example.
September 2020 was not a good time to own $35 billion worth of shopping centres across Australia and New Zealand. The world was deep in lockdown, and while consumers had money to spend, this was no use to bricks and mortar retailers.
This Thursday, Scentre decided to buy-back up to 10 per cent of this hybrid capital, or around $400 million. The pandemic is long forgotten, consumers have returned, rents are rising, and the mall operator can replace this funding at lower cost. In summary, the transaction worked exactly as intended.
Which brings us to the state of the broader listed property sector where a sense of delusion about the sharp move higher in government bond rates, and what that means for valuations, prevails.Capitalisation rates – a measure of yield and therefore relative value – remain at or near the risk-free rate for most property assets, which investors and analysts are finding hard to accept.
The office sector is coming under particular punishment given rising supply, lower usage and higher vacancy rates, not to mention horror stories from offshore investors and lenders. The Further, if the market’s lower implied valuations become reality, the REITs could have another problem: those high single-A credit ratings could be under threat.
Strano says Yarra’s fixed income fund would be willing buyers of REIT hybrids that at current market rates would yield about 9 per cent to 10 per cent.
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