Current accounting standards require changes in asset values to flow through the profit & loss statement, resulting in a significant turnaround in A-Reit reported results.

Most A-Reits have revalued a significant proportion, if not all, properties within their portfolios, undertaken by either independent valuations or by directors’ valuations, and usually a combination of both.

As anticipated by the agency on 12 August 2008, Australian property capitalisation rates have begun to rise, and the impact of these rises has started to flow through to valuations of properties held by A-Reits.

While sales evidence remains low, valuers have begun to adjust their capitalisation rate expectations upwards and property valuations have begun to contract where rental rises are unable to offset the rises in capitalisation rates.

The recent increases in capitalisation rates have been generally at or below the lower end of the 50-150 basis point range predicted by the agency in August 2008.

This is a result of the market being at the early stages of a readjustment phase that will see further rises in capitalisation rates.

‘The property cycle has definitely peaked and Fitch expects further downward adjustments in A-Reit property values, particularly secondary properties, as the present credit crunch reaches out more broadly into the property markets, forcing a reappraisal of values,’ said David Carroll, Director with Fitch’s Reits team in Sydney.

With the global credit crunch affecting property markets and values, there has been a significant refocusing by the A-Reits to protect their current credit metrics.

The A-Reit reporting season has seen a re-evaluation of property values with some assets marked down, a lowering of growth expectations, reductions or deferments of developments, changes in distribution policies to pay distributions from cash earnings, changes in executive management and an increasing intent to sell non-core or secondary properties to focus on higher quality core properties that should better weather the changed market conditions.

This reporting season has also seen several A-Reits mark down carrying values of property related businesses purchased in markets outside Australia during a more expansionary market phase.

On a more positive note, Fitch is not seeing tenant defaults as yet and occupancy rates remain high in most Australian markets the agency monitors, allowing property generated cash flows to remain strong.

The recent interest rate cut by the Reserve Bank of Australia should assist debt coverage ratios to remain relatively stable, although this may be offset by rising debt margins as existing debt facilities mature and are rolled into new facilities that in most instances will see higher margins being charged.

Fitch will continue to monitor the credit metrics of the A-Reits sector and provide commentary and analysis of the sector as devel opments occur.