JSE’s newer property funds feeling the squeeze

Demand for first-time capital market funding among the JSE’s newer property listings has largely been put on hold since market conditions changed in May and June.

Demand for first-time capital market funding among the JSE’s newer property listings has largely been put on hold since market conditions changed in May and June.

This is according to Global Credit Rating (GCR) corporate ratings head for Africa, Eyal Shevel.

In April, Mr Shevel said a number of companies were restructuring their debt by turning to the capital markets for finance and reducing bank debt, which was generally more expensive.

Mr Shevel said at the time that the number of bond issues by companies in the year to mid-April had almost reached the number between 2011 and 2012 combined, and most of the debt issued this year had been unsecured.

Delta Property Fund, which listed on the JSE in November last year, recently received a strong first-time credit rating from GCR.

In its inaugural issuance last month, Delta raised R190m from the issue of a six-month unsecured note with a fixed rate of 6.19%.

But Mr Shevel said last week that while the credit ratings agency had been working on a number of new ratings during March and April, market conditions had changed during May and June, after which ratings processes — bar Delta’s — were put on hold.

The listed property sector, which is closely correlated to the bond market, has experienced a period of price weakness and high volatility in line with bond yields since May 20 this year.

Mr Shevel said that Delta, which was growing quickly, had further growth opportunities to pursue and had good prospects in the bond market where it could get relatively cheap funding.

Besides Delta, there had been “a slowdown in demand” for funding from the bond market, where interest rates had climbed.

Mr Shevel said the need for capital market funding had reduced, as “a lot of the potential acquisitions that were on the table weren’t so lucrative anymore”.

Also, smaller funds would not achieve the same low funding rates in the capital markets as the larger, more established funds.

Mr Shevel said that while the newer property funds would still have their eyes on the bond market given favourable borrowing costs, these smaller funds needed to maintain their relationships with banks, which understood their individual risk profiles better than the capital markets.

Delta was accorded investmentgrade ratings of BBB+(ZA) and A2(ZA), with the ratings on a stable outlook.

The ratings agency said this reflected the fund’s high quality and long-dated leases with government departments and parastatals.

Credit agency ratings take into account the ability of a company to pay off its debts and meet its obligations on time.