Fitch Ratings said in a report released Dec. 11 that it is maintaining its stable outlook for U.S. equity REITs heading into 2014 as positive factors are kept in check by expectations of a slow economic recovery.
The outlook is consistent across all property types, according to Fitch, with all major sectors expected to post a stable performance in 2014.
REITs should continue to have solid access to capital markets for secured and unsecured debt, according to Fitch, and will opportunistically access the equity markets to fund acquisitions and developments. This access will lead to good liquidity coverage and improved fixed-charge coverage as REITs refinance higher-cost capital, Fitch predicted.
Property fundamentals are expected to remain positive across most asset classes. Fundamentals in the multifamily sector will likely be the strongest and continue on a positive course for 2014, although thepace of growth is slowing “dramatically,” Fitch said. REITs also look set to benefit from manageable development exposure, according to the ratings agency.
Meanwhile, Fitch said it is not expecting REITs to increase current levels of leverage nor meaningfully de-lever next year. Any de-levering possibilities will likely come about through organic means, Fitch said.
Fitch also emphasized that interest rate increases that result from stronger economic growth are positive for REITs, whereas a stagflation scenario of higher rates would almost certainly be detrimental. A more gradual increase in interest rates would be preferable for property sectors with longer-lease tenants, such as net lease, healthcare, retail, office and, to a lesser extent, industrial, according to Fitch. REITs with more fixed-rate debt on their balance sheets would be better positioned to withstand rate increases than those with more floating-rate debt, Fitch added.
Turning to individual sectors, Fitch is maintaining its stable outlook for multifamily REITs as a result of moderation in operating fundamentals and reduced access to capital with Fannie Mae and Freddie Mac reducing loan originations. Meanwhile, the office sector will enjoy solid access to attractively priced capital, good liquidity and stable credit metrics, Fitch said.
The retail sector, meanwhile, should see sustained, above-average operating fundamentals well into 2014 as a result of the lack of near-term supply. At the same time, beneficial long-term demographic trends should support demand for space in health care properties for the foreseeable future, Fitch added.