Expert warns of weaker average interest coverage ratios for commercial REITS

Fitch Ratings cited higher interest and vacancies as factors for the decline.

Average interest coverage ratios of Hong Kong commercial real-estate issuers may weaken to 3.5x in 2025 from 4.6x in 2023, Fitch Ratings warned.

The prediction would happen should the "Fed funds rate stay high at 5.5% in 2024 and 2025, coupled with a prolonged downturn in the Hong Kong office market characterised by a 75% lease renewal rate and 10% negative rental reversions," said the firm.

"We expect that both Link Real Estate Investment Trust (A/Stable) and Swire Properties Limited (A/Stable) would have sufficient rating headroom to withstand such a downside scenario. Conversely, Hysan Development Company Limited (BBB+/Stable) and Sun Hung Kai Properties Limited (A/Stable) would be more susceptible to breaching their downside rating thresholds," Fitch Raings said.

Whilst high interest rates and increasing vacancies may affect Hong Kong commercial real estate's interest coverage ratios, Fitch Ratings saidvaluation and funding risks remain low for its rated entities.

"We believe that our rated issuers’ loan-to-value ratios will remain below the 30%-35% range, even if a 1pp increase in cap rate causes office fair values to decline by 20%. Additionally, tenants' flight to quality is likely to benefit our rated entities, given the prime locations of their properties," the firm added.

The firm added that refinancing risk remains low for its rated issuers, thanks to their strong access to capital markets and quality assets.