Canada's Real Estate Financial Risk: A Post-Pandemic Rebound

DBRS Morningstar published a commentary reviewing Canada’s real estate financial risk outlook to YE2022. DBRS Morningstar’s publicly rated Canadian real estate entities were significantly affected as a result of the Coronavirus Disease (COVID-19) pandemic, most immediately by way of deteriorating financial risk assessments (FRAs) from a combination of declining EBITDA and issuers adding debt to manage uncertainty and fund operations.

Key highlights include:

-- We expect varying degrees of EBITDA recovery for each of the core subsectors (office, retail, industrial, and multifamily) with our general expectation that improvement will commence in the latter half of 2021 and accelerate into 2022.

-- A slowdown in debt growth in the latter half of 2021 and into 2022 as we expect issuers to finance acquisitions and developments via capital recycling rather than being entirely funded by debt.

-- We expect interest expenses to remain at low levels as the historically low interest rate environment has prompted issuers to prefund debt maturities at attractive rates and extend their weighted average debt maturities, further leading to an improved financial risk outlook.

-- Recent revisions to the business risk assessments (BRAs) of issuers, particularly for asset quality, since the start of the pandemic, have resulted in changing threshold levels of leverage for given ratings. DBRS Morningstar will continue to adjust BRAs as the shifting long-term fundamentals driving the real estate sector become clearer.

“As the ‘crisis mode’ of the coronavirus pandemic enters the rear view in the latter half of 2021 and further into 2022, we expect easing public health measures and tempered capital expenditures to drive FRA improvements for most publicly rated Canadian real estate entities,” said Christopher Tsichlas, Vice President, Real Estate, Global Corporates.