The interest rate increases that came in order to curb inflation led to an increase in government bond yields, but not only. The real estate companies also saw an increase in the yields to maturity of the bonds they issued, until some of them are approaching junk yields, that is, a level that suggests growing concerns on the part of investors about the ability of the companies to service the debt.
The rising interest rate environment certainly does not contribute to these concerns. The spread between the yield on the Tel Bond 60 index, which is the representative index of the corporate bond in the local market, and the government bond yield is widening, and the opening of the spreads between the corresponding government bond yields in terms of interest and VAT and the yields to maturity of the corporate bond may make fundraising difficult. The greater the gap between the yield of the corporate bond and the government bond, the greater the risk for the holders of the corporate bonds, who in turn are forced to raise debt at a higher interest rate in accordance with the increase in risk. The continued rise in interest rates may increase the risk posed to the companies’ ability to repay.
The rise in yields should put the spotlight on some of the prominent companies. For example, the yield to maturity of Norstar’s 12th bonds rose from 7.49% last June to over 13% today, and in fact the other series of Norstar are also trading at yields to maturity above this level. And Hajag’s 7th series bonds, for example, touch a yield of 17% – which definitely puts it in the category of bonds with a ‘junk’ yield.
The yield to maturity on the bonds of G City (formerly Gazit Globe) series 13 and 14 increased from 7% and 6.7% in June, to a level of 9.8% and 9.7% respectively. The G City Group has debt of approximately NIS 8 billion to bond holders. The yield to maturity of Hanan Mor bonds of the Yad series also crossed 9%.
The shares of the real estate companies also register sharp declines. G City falls by 13.6%, Norstar by 10%, Israel Canada falls by 5.5%, Hajj Europe loses 5%, Properties and Building loses 5.7%, and Hanan Mor by over 4%.
Is there a real risk for real estate companies in the local market?
A senior analyst at one of the banks tells the sponsor that “in the field of yielding real estate or the leading companies in the field of offices and shopping malls, I am not afraid of their ability to repay, these are companies operating in the Israeli market that have raised in recent years at low interest rates, and there is no concern about the ability to repay the debt of companies such as: Amot , from Lisron or Azrieli.
“But companies like Gazit Globe, which are exposed to more problematic markets, are in trouble. Gazit Globe’s leverage has risen since the Corona period to a very high level, and that is a story in itself, when the bottom line is that the company is looking for solutions to reduce leverage. The company itself tried to disperse activity and went to markets that are supposed to be booming, but So the corona crisis also devoured the cards, the currency exposure also hurt them.
“They made several purchases in Israel, such as in Tel Hashomer, to strengthen the activity in Israel, but in the end they increased the company’s leverage. If they have no choice, they will be forced to sell assets in Israel as well, apart from those in Brazil. Gazit Globe has debt repayments of 4.2 billion NIS 1.6 billion per year on average for the next four years, 1.6 billion this year, 2.6 next year. Against this, they have about NIS 2 billion in the bank. Specifically regarding Gazit Globe, the market expects to see assets sold and expects to see it do so at the values shown in the reports. If I lower the financial debt Net, I arrive at a company value of NIS 44 per share, today it trades at less than NIS 14. If I take what it trades in the books, and Citicon according to the market value, then the price is NIS 36 per Gazit Globe share. The gap actually reflects that the market does not believe in the value The property is on the books. The company understands this and is trying to make realizations that will restore the confidence of the market, if it succeeds in getting a fair value for its assets and that it is able to service the debt in the coming years.”
In the area of shopping malls, the situation seems good, but the question is what will happen in the next quarters based on inflation and the purchasing power of the public. The shopping area looks better than the office area now. What do you want first? In my opinion, it is the field of offices”.