Real estate companies at high risk with low-interest coverage and high debt burden: Moody's

Five of eight property developers rated B3 and below are expected to have interest coverage below 1.5x in both scenarios.

Credit rating agency Moody's reports real estate companies are facing a high exposure to risk due to a lower interest coverage base and a higher debt burden.

The report stated that among all sectors, property developers are expected to have the lowest average interest coverage at 2.5x in 2023, making it a challenge for them to withstand an increase in borrowing costs.

Five of eight rated property developers are expected to have interest coverage of less than 1.5x in both scenarios and are rated B3 and below, namely: Lippo Karawaci Tbk (P.T.) (B3 stable), Housing Development Corporation Limited (Caa1 stable), Alam Sutera Realty Tbk (P.T.) (Caa1 negative), Agung Podomoro Land Tbk (P.T.) (Caa1 negative), and Modernland Realty Tbk (P.T.) (Ca stable).

The report noted that the remaining three companies are expected to maintain interest coverage of at least 3.5x.

Moody's further mentioned that the six real estate investment trusts (REITs) have an interest coverage of 4.1x in 2023, but are more sensitive to interest rate increase compared to other sectors due to their high debt burden as reflected by high debt to EBITDA. In a 300 bps stress test scenario, the REITs' interest coverage will deteriorate quickly to around 2.0x, which entails the tighter 45% regulatory limit for debt/assets gearing.

Under the Monetary Authority of Singapore's (MAS) rules, REITs listed on the Singapore stock exchange have a debt/assets limit of 45%. However, if the REIT's adjusted interest coverage ratio exceeds 2.5x, the limit must be raised to 50%.

Moody's believes that crossing the debt/assets limit could lead to the regulator restricting the REIT from taking on new borrowings for purposes other than refinancing.