banks using covenants to sqeeze reits

len Pascoe interviewed a reit fund manager graham brenchley
Isn’t there still the worry that property valuations are
still pretty ropey and uncertain animals at present?

Well there’s that feeling out there about fire sales. We’ve been in this market for well over 12 months now and Centro went through 12 months or more of wondering whether the banks were going to pull the trigger and they never did; they took equity instead. I think the banks are trying to avoid pulling the trigger on asset disposals. What the banks are finding is that in the property ownership sector, the ability of landlords to service their debt requirements – that is, their interest payments – is pretty strong and, with interest rate cuts, has become even stronger.

What we’ve tended to see is that as values have dropped, landlords with their debt exposures have got closer to loan-to-valuation ratios, but I think the banks are seeing breaches of the loan-to-valuation ratios as an opportunity to re-price the interest and claw back some of the margin that they’ve been losing out, not as a signal for them to panic. I get the indication from bankers that their major concern is watching the coverage of interest ratios, which have been relatively strong and no real source for concern on the part of the banks to date.

That seems like a gentle way of putting it. Do you mean the banks have been using potential breaches of covenants, even though the interest payments are well covered, to squeeze every ounce of blood they can out of REITS,

I think that’s probably a valid point in many cases, yes.