RPT-Fitch: Short leases a major limiting factor for GCC property investment company ratings
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Sept 5 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says short-term leases and geographic and specific market segment concentration are viewed as limiting qualitative rating factors for property investment companies (PIC) in the Gulf Cooperation Council (GCC).
In the GCC the majority of office and residential lease period is typically one year. Land and Industrial facilities can have long-term leases, up to 30 years. However, they will usually have a break clause of less than one year. Fitch assumes all leases break or rents are reset at the earliest possible opportunity with conservative rental values and occupation rates. The short-term nature of leases in the GCC exposes regional PIC to lease renewal risk. However, Fitch notes the exception for prime and good secondary retail leases, which can be of a longer stable nature with an average of around seven to eight years.
For example, Majid Al Futtaim Holding LLC (MAFH, BBB/Stable), benefits from an average retail lease length of 8.1 years, which compares well with European peers, a high-quality and diversified tenant base exhibiting an estimated above 95% lease renewal rate, and occupancy rate at 98%.
Another example is Jebel Ali Free Zone FZE (JAFZ, B+/Stable), whose rentals are driven by land rent that constitutes almost 40% of its total rental income and have a lease term of about 7.5 years on average and a high renewal rate, with 80% of companies established in the free zone before 2006 still operating there. However, the other 60% of rents are contracted for a one-year term. As a result, rental contracts representing almost two-thirds of rental income expire every year.
Another limiting rating factor is the GCC regional players' geographic and specific market segment concentration. Concentrated portfolios on shorter leases are vulnerable to steeper declines in passing rental income in Fitch's rating analysis. The risk is particularly high for free zones operators as they are usually confined to one specific location, with the vast majority of tenants in one specific sector. Although rent in the GCC is typically paid in advance, during the economic downturn, some PICs granted grace periods and material rent discounts to customers, resulting in an increase in accounts receivables with low credit quality.
Fitch-rated EMEA investment-grade PICs exhibit relatively low interest coverage and high leverage metrics compared with similarly rated non-property companies thanks to the predictability of their income stream based on long lease terms and low tenant default risk. However, this is not the case for most of the GCC PICs, for which the shorter tenor and more concentrated tenants profile mean that Fitch would expect them to exhibit metrics more in line with non-property corporates.
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