“Property values have increased because of low interest rates in Australia and demand from foreign investors. However, rising property values have resulted in a decline in yields,” the ratings house said. 

“Falling yields, also known as capitalisation rate compression, can be seen in all property segments. We expect further compression to take place in the office and industrial segments.”

However, while lower interest rates were leading to falling yields for properties owned by the REITs, they were also fuelling lower borrowing costs, which meant companies were better able to service their debt and survive declining values in their portfolio more easily, Moody’s said.

“Rated A-REITs’ average interest coverage, measured by EBITDA against interest expense, is now 4.7 times, up from 4.4 times a year ago, reflecting earnings growth and lower interest rates,” the ratings provider said.

“Average cost of debt for the rated REITs has fallen considerably over the last seven years. However, high levels of interest rate hedging mean the improvement in interest cover is slow. We expect interest rate coverage to improve to around 4.9 per cent over the next 12 months.”

Moody’s also added that the companies’ capacity to withstand market volatility had improved over the past several years due to better management of debt.

“Rated A-REITs’ financial discipline has improved since the last global financial crisis when property devaluations were widespread and some REITs had to sell assets or raise equity to stay within bank covenants,” the ratings house said.

“A-REITs have shown improvements in... gearing, diversification of debt sources, average debt maturity and interest coverage.”