Short leases 'limiting factor for properties'
Manama, September 6, 2013
Short-term leases and geographic and specific market segment concentration are limiting qualitative rating factors in the GCC property market, according to Fitch Ratings.
The ratings agency said this in a report on property investment companies (PIC) in the GCC, reported the Gulf Daily News, our sister publication.
In the GCC, the majority of office and residential lease period is typically one year. Land and industrial facilities can have long-term leases, up to 30 years.
However, they will usually have a break clause of less than one year, it said. Fitch assumes all leases break or rents are reset at the earliest possible opportunity with conservative rental values and occupation rates.
The short-term nature of leases in the GCC exposes regional PIC to lease renewal risk.
However, Fitch notes the exception for prime and good secondary retail leases, which can be of a longer stable nature with an average of around seven to eight years.
For example, Majid Al Futtaim Holding (MAFH, BBB/Stable), benefits from an average retail lease length of 8.1 years, which compares well with European peers, a high-quality and diversified tenant base exhibiting an estimated above 95 per cent lease renewal rate, and occupancy rate at 98 per cent.
Another example is Jebel Ali Free Zone FZE (JAFZ, B+/Stable), whose rentals are driven by land rent that constitutes almost 40 per cent of its total rental income and have a lease term of about 7.5 years on average and a high renewal rate, with 80 per cent of companies established in the free zone before 2006 still operating there.
However, the other 60 per cent of rents are contracted for a one-year term. As a result, rental contracts representing almost two-thirds of rental income expire every year.
Another limiting rating factor is the GCC regional players' geographic and specific market segment concentration.
Concentrated portfolios on shorter leases are vulnerable to steeper declines in passing rental income in Fitch's rating analysis.
The risk is particularly high for free zones operators as they are usually confined to one specific location, with the vast majority of tenants in one specific sector.
Although rent in the GCC is typically paid in advance, during the economic downturn, some PICs granted grace periods and material rent discounts to customers, resulting in an increase in accounts receivables with low credit quality. – TradeArabia News Service