As safe as bricks and mortar

In the second of two roundtables exploring corporate sectors on the front line of the COVID-19 crisis, in November 2020 KangaNews and Westpac Institutional Bank hosted issuers and analysts from the Australian REIT sector to talk about pandemic fallout. The conversation covered crisis response and the new shape of the sector in future, including the likely impact on individual property categories.

  • Lilly Cheung Group Treasurer GPT GROUP
  • Pauline Chrystal Portfolio Manager KAPSTREAM CAPITAL
  • Matt Kennedy Head of Investment Origination, Asia Pacific ROTHESAY LIFE
  • Craig Parker Senior Director, Corporate Ratings S&P GLOBAL RATINGS
  • David Rowe Group Treasurer STOCKLAND
  • Phil Schretzmeyer Head of Treasury and Group Planning CHARTER HALL
  • David White Head of Treasury DEXUS
  • Gary Blix Head of Corporate Origination
  • Peter Block Head of DCM, Australia
  • Michael Chen Head of Sustainable Finance
  • Tim Keating Executive Director, Head of Real Estate
  • Michael Lucas Head of Institutional Credit Sales
  • Matthew Zaunmayr Deputy Editor KANGANEWS

Block Can the borrowers give an overview of how business performance has been affected by the events of 2020? The composition of REIT portfolios is obviously very different, so it would also be interesting to hear some thoughts about the relative performance of the sectors in which issuers operate – where performance has been challenged and what has held up relatively well.

SCHRETZMEYER A global pandemic and everything that has come from it has made for a year that has not been a pleasant experience for anyone.

Charter Hall now has A$43 billion (US$32.7 billion) of assets under management across office, industrial, retail and social-infrastructure sectors. Charter Hall is a fund manager so does not hold direct property on balance sheet but manages capital on behalf of third-party investors in listed and unlisted funds. Going into March, we did a stocktake of our business. We looked through our list of tenants and assets, and generally made sure the business was as resilient as it could be.

We have always had a long WALE [weighted-average lease expiry] theme across the business. This means we do not have a large number of imminent lease maturities in any given year. This placed us in a good position to manage through the market disruption.

We do have retail shopping centres in our portfolio, accounting for around 10 per cent of funds under management, and this was the first area we focused on. Our shopping centres are anchored by tenancies with Coles, Woolworths or Aldi, which make up a large proportion of the GLA [gross lettable area] and rents.

Pleasingly, as essential services, all our grocery tenants continued to trade through the pandemic so these centres kept generating income for our funds. Everyone saw the empty aisles in shopping centres when the pandemic first hit. Supermarkets were struggling to keep up with demand in the early part of the pandemic rather than having any significant revenue issues.

Even so, we stepped in quickly to work with our non-grocery tenants. Alongside the supermarkets we worked with our speciality shops – including chains and small businesses.

In the office space, once we got through the initial couple of months of the pandemic, we wanted to make people comfortable with coming back to the office again. Offices should be a safe space and a good place to work, where employees get efficiency from being close to their co-workers.

Meanwhile, industrial has been the darling of the property sector. Investors have been very comfortable with industrial exposure as they see the growth in e-commerce – a trend coming into the pandemic that has been accelerated. We have seen strong capital flows in this sector and recently completed a A$2.6 billion equity raise for our prime industrial fund. We have also raised 10-year money in the debt capital markets for this fund.

ROWE COVID-19 had an impact in the second quarter of the calendar year, particularly across our retail portfolio, despite the portfolio being about 70 per cent discretionary spending. In our 30 June results, the bulk of the debt we had coming through the portfolio from not receiving rent was largely from our retail book.

This amounted to about A$100 million where it is typically around A$10 million on an end-of-month basis, and the expected credit loss on this portfolio was also much higher than we normally expect. But we have seen our rental collections improve as stores have opened up. Our shopping centres are now operating at around 96 per cent foot traffic.

The national code of conduct set out a format for negotiations over the March-June period, and we are now in a level of abatement and deferrals that is lower than prior periods. Rent collections are increasing as lockdowns ease and economies open.

The other interesting part of the portfolio is the residential space. We slowed down our development expenditure over the six-week period in April and May but it has returned to long-run average. Our June results show very strong flows coming out of the residential part of the business and operating cash flow is very strong.

Enquiry into the residential market is at a two-year high and this has clearly been helped by the stimulus going through the economy. We have seen all residential property markets perform well and various state-based measures are continuing, which we expect will continue to provide a tailwind for the business.

All things being equal, the business has performed quite well despite the pandemic. The advantage of having a diversified business is that cyclicality in some parts of the business can offset downturns in other parts of the portfolio.

“Industrial has been the darling of the property sector. Investors have been very comfortable with industrial exposure as they see the growth in e-commerce – a trend coming into the pandemic that has been accelerated.”

Block Stockland has a number of land banks. Will these continue to underwrite the business for the foreseeable future?

ROWE I think so. We have also been able to restock this part of the portfolio. We did a very large transaction in New South Wales just prior to the pandemic and we recently restocked in Victoria, too. We have seen a number of opportunities to restock the land bank come across the desk and I think this will continue to facilitate cash flows going forward.

Block What has been GPT’s experience of the crisis, across business areas?

CHEUNG We are exposed across the office, retail and logistics sectors but retail has been the most affected by the government shutdowns. At one stage in the peak of the lockdown we were down to only essential retail being open, which was 30-40 per cent of retailers in our centres.

The situation has improved as restrictions have lifted. Outside Victoria, around 95 per cent of our retailers are now open, and our foot traffic and sales are only down by around 5 per cent from the same time last year. As lockdowns have eased in Victoria, we have seen regional centres trading at similar statistics.

Our Melbourne Central shopping-centre asset in the Melbourne CBD is an exception. It has been affected by the tourism and education sectors’ challenges and low physical office occupancy. Even then, foot traffic is down by around 50 per cent and we have around 80 per cent of our retailers back open. These trends are improving week-by-week and we will hopefully see a better 2021.

The national code of conduct is making for a very extensive process of negotiations regarding rental relief, on a tenant-by-tenant basis. However, the deals that have been agreed with tenants are currently tracking better than what we provisioned for in June.

With the positive vaccine news we have had much more positive feedback from office tenants around staff returning to the CBD. Within the office sector, occupancy and rental collection has remained high but physical occupancy of our buildings has declined as tenants implemented work-from-home arrangements. In places where restrictions were eased to a greater degree and earlier, such as Brisbane, we see office occupancy at 50-60 per cent and incrementally improving.

Block Interest rates are close to zero and will be for the foreseeable future. We also have a few data points on cap rates and from offices changing hands. Do these factors increase confidence in the outlook?

WHITE We have been selling a few assets ourselves and there is clearly still strong demand from investors. A lot of this is offshore money as Australia remains a very attractive place for capital. This provides additional support for valuations in the office sector.

There will be cash-flow challenges in the short term while people work out what they need, but we are not overly concerned on material weakness to wholesale valuations at this point given these dynamics.

The future of office working

Empty CBDs were perhaps the most visible sign of COVID-19 in Australia, as many thousands switched to home working during lockdown. Most office workers are yet to return even as infection rates have cratered, and the future of the office sector itself is under discussion.

ZAUNMAYR Has the way people work during the pandemic changed the long-term outlook for the office sector in particular?

CHEUNG I think there will be ongoing discussion around flexible working and the future of the office. The key for tenants is to work out what their staff want and what their future office looks like.

There are mixed messages, but most employers are trying to strike a balance between workplace flexibility and recognising that the role of the office is still important in relation to the mental health of their staff and making sure people remain connected. There are further business benefits of having a central workplace, such as driving company culture, collaboration and innovation.


The CFOs we have spoken to believe enforced social distancing and working from home has proven successful. They have been able to continue operating and, in the longer term, see this as an opportunity to revisit their tenancy requirements and potentially reduce costs.


Zaunmayr What is the S&P Global Ratings view on the REIT sector in the context of pandemic trends?

PARKER Determining how the Australian sector would cope with enforced social distancing was the great unknown – particularly how this would affect retail landlords.

Going into the pandemic, our rated portfolio was well placed within financial risk profiles and policy settings. No issuers were pushing the boundaries of their financial targets and therefore they all had capacity to deal with requested rent abatements and waivers.

Unlike other jurisdictions, the Australian sector had a commercial code of conduct to deal with SMEs while larger retail tenants were deemed big enough to negotiate directly with landlords. This methodology enabled tenants and landlords to deal with COVID-19 restrictions, albeit it put pressure on landlords’ earnings.

We went into March and April running scenarios that removed three months’ rent from landlords’ future earnings and looked at how this would affect credit ratings. None of the Australian issuers faced an immediate downgrade, though in our global retail landlord portfolio some entities’ ratings were lowered.

We put a number of Australian issuers on negative outlook. One was Vicinity Centres, which we resolved back to stable outlook when it did a sizeable equity raise. Other fund managers took protective measures to bolster their ratings, which I believe indicates a broad commitment to maintain current ratings.

The commercial-office sector did not face the same immediate earnings pressures, given its limited SME exposure. Our landlords mostly lease to large corporate and government tenants, which have kept paying rent. This said, longer-term structural concerns regarding the increasing prevalence of work-from-home arrangements and falling demand for office space remain.

The industrial sector has made hay while the sun has been shining. We recently placed Goodman Australia Industrial Partnership’s rating on a positive outlook – one of our first positive moves in the REIT space globally since the pandemic began.

The wide range of actions taken by government in response to the pandemic appear to have worked. Meanwhile, foot traffic quickly returned to shopping centres and people started spending money once each respective state economy reopened. The lingering question is how many retailers will survive after the Christmas period. Also, the impact on the consumer when government assistance tapers off in early 2021 is still very much unknown.

MASON We are now seeing a good level of credit spread in retail but the question is whether investors will be comfortable with the sector’s outlook. We are also asking whether retailers can survive after Christmas. There has been a lot of latent spending going on as lockdowns have eased but it is not clear how persistent this will be.

We know some shopping centres have pockets of vacancy coming through. There has been a shift going on in shopping centres toward entertainment and living spaces, and it will be interesting to see how this pans out.

Lending liquidity

The story of March and April in Australian institutional lending was one of borrowers scrambling to shore up liquidity and banks trying to keep pace with consequent requests. Even in the REIT sector, it was more the volume of enquiry than credit that posed the biggest challenge.

BLOCK How significant was the volume of requests for liquidity coming through to bank lenders at the height of the crisis, as well as requests for covenant waivers and other structural changes?

KEATING Banks generally maintained good provision of liquidity to the REIT sector even at the height of the crisis. The factors that play into banks’ ability to lend to REITs are capital allocation and concentration to the sector, the bank’s balance sheet and broader liquidity, and risk appetite for these borrowers.

On capital, Westpac Banking Corporation was well positioned – as were most banks. Yield had been tight for some time and we had been adjusting for a long time around downside factors to our internal risk rating.

Through other cycles, there have been circumstances where concentration of capital has meant deliberate moderation in various books – keeping in mind these books are not just institutional but also business-bank exposure, where sometimes leverage is higher and cycles have more impact.

Westpac entered the crisis with a strong balance sheet, and while there was a short period of dislocation in debt capital markets there was also a strong inflow of deposits.

From a risk-appetite perspective, institutional balance sheets were in a good position, being conservatively geared and well protected. This meant we were comfortable providing support, notwithstanding some of the commentary on valuation decline. This commentary probably affected the business-bank book more than the institutional book.

Early on in the COVID-19 crisis, we were asked to consider a wave of corporate liquidity requests. Some were to protect balance sheets but some money was also sought for opportunistic situations. We responded positively as long as the purpose made sense.

We were also asked to consider a wave of covenant-relief scenarios, particularly in the retail sector where the commercial code of conduct hit hardest. These went through a triage process, but we were able to work through priorities cooperatively across the bank.

Internally, as a result of the forward outlook, we underwent some downward risk-rating processes. On the whole, even when covenant relief that would trigger a pricing discussion was required, we absorbed the cost and were only looking at the covenant relief rather than the pricing implications.

The challenging conversations during this period came mostly from the dislocation in debt capital markets increasing pricing.

Zaunmayr How are investors approaching the sector given the trends being discussed?

MASON Prior to the pandemic our opinion was that spreads were becoming tight across the REIT sector. All asset classes were tightening significantly so we were investing more for carry than for anything else.

This meant we were in a good position to add credit after the initial pandemic impact – and we have been happy to do this in the property and infrastructure sectors.

We were surprised at how long it took some issuers in the sector to tap the local market after going to their banks to shore up liquidity positions. A lot of issuers were not confident that the market would be there, but there is a lot of capital floating around for corporates.

CHRYSTAL We were constructive on the REIT sector before the onset of COVID-19. Even so, in the office space we were keeping an eye on the emergence of sub-leasing and on forthcoming supply. Net absorption had started turning negative in Sydney and Melbourne.

There were also some headwinds in retail before the pandemic including some large department stores and retailers giving up space, and MAT [moving annual turnover] growth and leasing spreads turning negative. We were a bit worried in the retail segment but technicals were very strong for corporates and the REIT sector more broadly. We participated in the Dexus 12-year deal at the start of the year, a tenor that is normally outside our comfort zone.

When COVID-19 hit, we were a little shocked at how quickly liquidity disappeared across the board. It also came back later in REITs than in other sectors. Liquidity returned to the office space first. While we were still cautious, we gained a lot of confidence from seeing the actions taken throughout the sector including equity raises, withheld dividends and delayed capex.

This got us comfortable to invest into the sector as early as May, albeit mainly at the front end as we still viewed the sector as volatile. We are still not quite there at the longer end.

KENNEDY We had not done a lot in the REIT sector prior to this year, other than a few positions in the USPP [US private placement] market. We made a play into the sector in January and February. Our structure and liability profile means we tend to be more competitive in longer tenors.

We do not typically invest into straight retail: our focus is office and industrial. We did the Dexus and GPT 12-year deals early in the year as well as a US dollar deal for Goodman in March, where we took most of the 10-year tranche.

When the pandemic hit, we took some time out to see the market impact and to recalibrate our models. We have a specific risk profile in that we have a lot of fixed liabilities and we only buy investment-grade credit. We made sure our capital position was strong and we have been investing conservatively over time so did not have any issues with the portfolio itself.

As we rolled through the pandemic, we saw relative value in the US – which has been maintained. We are also still constructive on the Australian sector, particularly in office and industrial.

Internationally, we have put US$1.5-2 billion to work in REITs so far this year and a lot of it has been into the industrial sector. Most recently, we have seen GAP [Goodman Australia Partnership] and CPIF [Charter Hall Prime Industrial Fund] come to market. In each transaction, however, we struggled a bit with the pricing level relative to global comparisons and where we believe the market will head from a macro perspective. Everything in Australia we invest in must be compared with global levels.

We remain very constructive on the REIT sector and were impressed with what treasurers and CFOs did through the lockdown period in identifying the liquidity pockets they needed. I understand there were equity plays in the retail space, too, and I know a lot of borrowers have found very strong support from their equity partners.

Relative value is important for us and we have found it challenging trying to get money away in this market when we are comparing to levels in the US. For example, last week we did a 10-year deal in J.P. Morgan’s flagship US fund, which is A-band rated – and this came at 170 basis points over US Treasuries. This gives a sense of why we may sit on the sidelines in Australia for some deals.

MASON We remain constructive on the REIT sector notwithstanding some of the issues around retail – which were present before the pandemic. We were positioned for these and were therefore still comfortable.

Industrial is very much the darling of the market and the only question is at what point in the cycle this may change. There is supply coming on board, particularly in western Sydney as the second airport is built. We are thinking about what this supply does to the sector.

We are generally comfortable with issuance pricing. We do rock-bottom spread analyses that give us a base case at which we are willing to invest given a particular scenario analysis. Of late there has been significant tightening but there is still some value across the curve, particularly given the high quality of issuers in the Australian market.

In residential, we are keen to see the effect of changes to stamp duty. Will this just be a price hike, or will it allow more first homebuyers to get onto the housing ladder? Meanwhile, we know immigration will be low in the immediate future but we also know development has come off significantly, particularly in the apartment space.

“Because we did not necessarily need the liquidity, we received some feedback that it might be best if we came back later. Banks were going through a triage process, looking at their balance sheets and prioritising clients that really needed the liquidity.”


Block There was some issuance from REITs in Australian dollars early in 2020, including at 12-year tenor. How well funded were borrowers heading into the crisis?

WHITE We sourced a couple of opportunities from banks in the early stages of the crisis when the trajectory for debt markets was not so favourable. Banks were generally very supportive of issuers, although they prioritised businesses that were more challenged. In my experience, they were also more focused on assisting existing clients than on adding new clients at this time.

We managed to issue A$500 million with 12-year tenor in the public market prior to the crisis, following a A$200 million 10-year deal late in 2019, and were very pleased with the outcome. The strength and resilience of the domestic public market in 2020 has been very pleasing. This is also a testament to the quality of assets and their cash flows across Australia’s REIT sector, which have given investors comfort.

The depth, tenor and price available in Australian dollars has been very strong and it remains a key market for us. Our preference is to issue in our home market, so developments in 2020 have been encouraging.

ROWE We did a total of A$330 million equivalent in Hong Kong dollar issuance in January and March. This shored up our liquidity going into the crisis. Liquidity was like toilet paper – in short supply – for a brief period of time while everyone was trying to figure out what they needed to do to deal with the crisis.

We put additional liquidity in place at the request of the board to ensure we had sufficient funding if required. Debt capital markets seized up quickly, as did the commercial paper market. We also did not have the code of conduct in May, so we were in no-person’s land with regard to the impact on commercial tenants.

The banks have been very accommodating with corporates on covenant waivers and understanding business needs. There was obviously a step up in pricing, which no treasurer likes, but in times like this you make a balance between the inherent risks in your portfolio, the appropriate cost and the tenor we need to ensure we come out at the other end.

Markets today are very conducive. There is good trading and a lot of new issuance coming to market – although still not a lot from the REIT sector, including in USPP format. Spreads have contracted a lot, though, and we have had a lot of reverse enquiry from across the globe.

We let a USPP mature in July and we redeemed a domestic deal in late November. We have no plans to issue again in 2020. Our view is that we have shored up liquidity so we will get to our half-year results and then make calls on where we think the market and economy will be.

I have some nervousness around the slowdown of government stimulus and what this means after Q1 2021. We will not make any significant adjustments to liquidity until we start seeing economic numbers in Q1 and Q2 2021.

“While we were still cautious, we gained a lot of confidence from seeing the actions taken throughout the sector including equity raises, withheld dividends and delayed capex. This got us comfortable to invest into the sector as early as May.”

CHEUNG Similarly for GPT, going into the pandemic we were in a strong liquidity position that was further enhanced by our A$300 million 12-year deal at the start of the year. When the pandemic started we were not in a position where we would be forced to do anything.

However, given how quickly liquidity dried up we thought it was prudent to undertake some bank extensions and to source some new facilities in our wholesale fund.

Banks were generally supportive of the process, but because we did not necessarily need the liquidity, we received some feedback that it might be best if we came back later. Banks were going through a triage process, looking at their balance sheets and prioritising clients that really needed the liquidity.

At the onset of the pandemic, some Asian banks used the opportunity to improve their exposure to the Australian market – using it as leverage to get into some of the corporates they have been chasing for a while. We have seen spreads come in quite well now and over the last couple of months we have done some Hong Kong dollar private placements at 10-15 years, for a total of around A$200 million, at similar levels to before the pandemic.

It is good to see tenor in the Australian dollar market stay resilient through the crisis. At the beginning, I was worried that the progress made in 2019 and early 2020 would be pared back – but it was good to see some long tenor being executed in the last few months.

SCHRETZMEYER Our balance sheet was in very good shape coming into the pandemic but we were working through some open transactions during March and April. The banks held the terms and pricing on offer, and we closed these transactions. They should get significant credit for the way they acted during the crisis.

We did A$6.4 billion of debt transactions in the six months to December 2019 and closed another A$4.1 billion in the six months to June 2020. We still had access to debt capital during this period – and we had some interesting conversations because we were looking for growth capital. We had to spend time with our lenders on this, but liquidity became available once they understood our reasons and strategy.

It is now a very interesting time for liquidity. Six months ago, the banks were very focused on drawdowns and liquidity, now the banks prefer to be drawn because of the sheer volume of cash in the system. The extent of change within a short space of time has been very interesting.

ROWE One thing that caused some frustration when looking for liquidity was not understanding the process banks go through. We found it quite frustrating trying to get an outcome because it sometimes took a lot of time to get responses.

This is just a reflection of the market rather than any particular bank. Issuers need to understand where the banks are focused, what part of the process they are in, and how they are identifying and dealing with their clients. This is a good lesson for the future.

“We were surprised at how long it took some issuers in the sector to tap the local market after going to their banks to shore up liquidity positions. A lot of issuers were not confident that the market would be there, but there is a lot of capital floating around for corporates.”


Zaunmayr How comfortable are investors with pushing tenor boundaries in the REIT sector?

MASON We do not have a hard stop at 10 or 12 years. It really depends on what we are trying to do with our mandates. Our insurance mandates are trying to match assets so we are very comfortable taking extended tenor in higher-rated names.

Our comfort is of course sector-dependent, too. We may not be comfortable with a 15-year deal for a shopping centre REIT, for example.

KENNEDY We have previously considered the USPP market to be the only place we could go to get longer-tenor REIT exposure. The transactions we saw at the beginning of 2020 were a good start to lengthening out in Australian dollars.

We only started looking at the Australian dollar market in 2019 but we would be open to lengthening beyond 10-12 years. Given our level of conservatism and the way we like to invest, we would look at the more senior and highly rated names for 15-20 year deals.

We do not like to take a lot of credit risk, but once we are comfortable we like to take a longer-term view – in size. We can do this is in the USPP market, the Australian dollar market and in straight loan format, which comes down to getting a bit more spread for illiquidity.

We match our assets to our liabilities so we have some regulatory constraints compared with local investors around make-wholes, prepayments, and clean-up calls.

CHRYSTAL Thinking about 15 years gives me cold sweats, I must admit. Our product offers absolute return with a focus on low volatility. We run spread duration around 2.5-3 years. Two years ago, our sweet spot was 3-5 years and now, given how the market has evolved, it is 5-7 years – though closer to five.

We need a strong incentive to take the next step and go beyond 10 years. However, we participated in the Dexus 12-year deal at the start of 2020. This was the first time we went that far, though.

We consider deals on a case-by-case basis. We have always liked Dexus as a well-managed business with a strong balance sheet and track record. Pricing for the 12-year deal was reasonably attractive so we were happy to participate.

In the current conditions, we would still extend to 10 years if it is the right deal. We probably would not for a retail REIT but we have taken part in some of the industrial deals that have come recently as the tenor makes sense for an issuer with longer WALE.

However, if we had the choice between buying a 15-year office REIT and a five-year retail REIT, all else being equal we would likely pick the retail REIT. A QIC Shopping Centre Fund 2025 maturity at the moment gives a spread of around 170 basis points, compared with a Dexus 12-year giving around 140 basis points.

There is still a lot of uncertainty and spreads have crunched in to a level that is not representative of the fragile economy. If there is even a little bit of spread widening, at such tight levels all our carry will be wiped out.

If there is a sell-off it will also be much harder to raise cash by selling long-dated bonds than by selling short-dated ones. Not much would motivate us to go out to 15 years at the moment. We would rather go shorter and down the credit curve, or to a less loved part of the sector.

USPP market appeal

US private placements (USPPs) have been a key source of debt for corporate Australia for many years, with the REIT sector providing more than its share of supply. The market was less active in 2020 but issuers say they expect it to remain on the funding menu.

BLIX If REITs can issue 12-year tenor in the domestic market where does USPP come into the equation?

CHEUNG There has not been much Australian REIT issuance in the USPP market over the course of 2020. We did one in 2019 but since the start of 2020 the domestic market has been very strong at long tenor so we have favoured it.

I still see a place for the USPP market in future, though, and yields have been coming back in. It is also still important for diversification of investors.

It is good to see the Australian dollar market extend to 12 years and it would be even better to see it go toward 15 years – for which we traditionally had to go to USPP. Having multiple options for long tenor would be good.


The domestic bond market has performed well in 2020 but it has a history of coming and going. Hopefully this is not the case going forward and it is the first market we look to – but it is certainly not the only one.


Lucas At our last sector roundtable, covering airports and transportation infrastructure, Australian fixed-income investors suggested that part of the reason they have been more accepting of long tenor is that if they are going to allocate for the challenging next couple of years they might as well take the premium available for a 10-12 year investment. Is it the same case for REITs?

MASON Absolutely. We are looking to extend tenor in all our portfolios because we still believe in this trade. With ongoing stimulus, I do not think there will be a cliff; there will probably be a tapering. At the moment there is no incentive for governments to step away from markets. There is a lot of money sloshing around and it will only do one thing, which is to tighten pricing.

Block Charter Hall debuted some of its funds in the domestic market in 2020, having previously been a prominent USPP issuer. What was the thinking behind coming to the local market in 2020?

SCHRETZMEYER We had been working on our Charter Hall Exchange Finance (CHEF) transaction since August 2019, having sourced a rating for this fund. This process included giving some consideration to which investor base we would go to, given we had not issued in the Australian dollar market previously.

In considering the choice of market we had a preference for issuing domestically. For one thing, there are significant efficiencies in issuing bonds in Australian dollars rather than going to offshore markets for our transactions. This takes out the complications of currency swapping and also means we can meet local investors and have constructive conversations about our platform and future issuance.

In preparing for this deal we spent a lot of time with investors, including through a nondeal roadshow. They were very accommodating and gave good feedback on the bond and the structure, which gave us confidence to issue.

We were pleased with the CHEF result – so pleased that we followed up with another transaction for our industrial fund one month later. Hopefully the market remains conducive for issuance because we want to do more in Australian dollars, across multiple funds.

Australian REITs are a solid credit as a general rule. We have done a very good job maintaining solid balance sheets coming into the pandemic and those that have had to issue equity to shore up their balance sheets have done so. Australian REITs represent a good set of investment-grade credits for the domestic bond market.

Block Do the actions REITs have taken to shore up liquidity through the crisis change S&P’s view on the sector’s overall level of funding or credit risk?

PARKER We look at liquidity over a 24 month period. We also consider weighted-average debt maturity (WADM). In the REIT sector, we look for a minimum of three years WADM – unlike a traditional corporate, where it is two years.

We are mindful that the short-term debt rollover issues REITs encountered during the 2008 financial crisis, where liquidity dried up, need to be accommodated in their liquidity and debt maturity profiles. This is not a problem for our rated portfolio. All the issuers within it are all either A or triple-B rated, and have the capacity and willingness to seek extended debt tenor.

All the fund managers within our rated portfolio were prudent in shoring up short-term liquidity. They were in unknown territory going into the pandemic and sought to draw down bank lines in case they needed to address unexpected funding needs.

It is beneficial if issuers have ready access to the Australian dollar market so they can avoid any cross-currency foreign-exchange issues they encounter when raising debt offshore. We want to ensure the foreign-currency amount they draw down is actually payable in a known Australian dollar amount in five, seven or 10 years’ time.

"The transactions we saw at the beginning of 2020 were a good start to lengthening out in Australian dollars. We only started looking at the Australian dollar market in 2019 but we would be open to lengthening beyond 10-12 years."


Chen Australia’s REIT sector has been one of the most active among local corporates when it comes to green-bond issuance, though those that have come to market still only represent a relatively small group of issuers. How engaged are issuers with green funding, and what would induce them to bring deals to market?

WHITE ESG [environmental, social and governance] continues to be a key focus for Dexus and it is integrated into our business operations. It is also an increasing focus for equity and debt investors. On the other hand, we want to avoid bespoke requirements. We consider all issuance if it is aligned with the processes we already have in our business.

From a bond-market perspective, we also need to consider any incremental compliance costs associated with diversifying into ESG-related funding.

CHEUNG It is similar for us: we are monitoring the green-bond space but we have not felt the rationale to issue a green bond to date as we have not seen a pricing benefit from doing so.

For some entities, issuing green bonds is good for changing internal behaviour. But GPT has strong practices and disclosure in place already.

One attractive thing about this type of funding is that green bonds appear to have a stickier investor base. There is also evidence that German sovereign green bonds are trading at slightly tighter levels than vanilla bonds with the same maturity. This is evidence of benefits coming through, so we will keep monitoring developments.

SCHRETZMEYER We are looking closely at a sustainability-linked loan (SLL). This has some attraction because bank debt is more flexible and terms can be amended if necessary.

This is important as methodologies often change. For example, we use GRESB [global real-estate sustainability benchmark] ratings, but if this methodology changes it potentially has consequences for a SLL.

At this stage we have not seen the pricing benefit of these loans, but the amount of capital that can be deployed into this type of finance will continue to increase.

A lot of banks have targeted the allocation of a certain proportion of their loan book to GSS [green, social and sustainability] finance. This unlocks additional sources of debt capital with a sustainability angle, which could be a powerful tool and also aligns with our funds’ ESG strategies. The bottom line is that we have all seen the benefits of having access to deeper pools of liquidity in 2020.

Chen Stockland has a euro green bond maturing shortly. Has the company considered issuing green bonds in the domestic market or other types of labelled debt, for instance social bonds?

ROWE The real-estate sector has a long history of sustainability in business strategy, and the work we have done as corporate entities is very strong. The weakness has been linking this to debt capital markets.

We have a green bond maturing in November 2021 and are now doing work around the framework we put in place in 2014 and the new frameworks that capture broader ESG metrics as well, not just green.

We continue to do a lot of work with the investor community to understand what it is looking for. I think this can be a very good diversification play. If we can leverage the corporate-sustainability angle there are very good opportunities in capital markets.

“I have some nervousness around the slowdown of government stimulus and what this means after Q1 2021. We will not make any significant adjustments to liquidity until we start seeing economic numbers in Q1 and Q2 2021.”

Chen GSS bond pricing can be a function of supply-demand imbalance as more banks and investors want to participate, but there is also a growing belief that greener companies have better credit outcomes. To what extent are ESG factors being factored into core credit analysis and is this translating into pricing?

PARKER We have been incorporating ESG into credit ratings for a long time, particularly highlighting governance factors in ratings. In the REIT sector, governance risks have usually manifested in whether the REIT is externally or internally managed.

We address the environmental and social components in our assessment of business risk. Investors are demanding more feedback from us, so we have added a paragraph to our rating reports. Typically, we address the green credentials of a REIT’s buildings, focusing on greenhouse-gas emissions and other elements.

Unlike a fossil-fuel company, the ESG assessment generally is not a credit driver for REITs. Environment and social elements are referenced throughout our credit assessments – to assist readers we have coalesced this into a dedicated section of our analysis.

Zaunmayr What about credit investors? What role does ESG play in analysis and what value do labelled GSS bonds have in the context of the way you look at issuers?

CHRYSTAL We integrate ESG into our analysis the same way we integrate any type of risk. If there is a significant ESG risk that has not been assessed by the issuer, we will have concerns that we want to translate into pricing.

The REIT sector is an ESG outperformer so we do not feel labels add anything to its bonds. We find green bonds trade a bit tighter than vanilla, so investors are giving up a bit. We need to consider whether this is worthwhile when ESG factors are already being addressed across the sector.

We potentially have interest in sustainability-linked bonds because this product is not just slapping on a label or greenwashing. It is making sure the company aligns its ESG targets with what we want to see, and then translating this into pricing when they are achieved.

KENNEDY We are beginning to look at ESG a lot more. One of the questions when we do our due diligence is how easy it is for issuers to satisfy their ESG targets. If it is very easy to set up a platform and an issuer is already meeting targets, our view is that there should not be a meaningful price differential.

If there is a real, strategic and meaningful linkage to sustainability, and it is something that both can be measured and for which there is accountability, we would be more supportive of a price differential.