Feel the squeeze: 3 ASX property shares with a whole lot of debt

A man sits at a desk holding a small replica house in his hand, upset at the sale of his property.A man sits at a desk holding a small replica house in his hand, upset at the sale of his property.

Many ASX property shares have come under pressure in recent weeks, as concerns over rising interest rates have weighed on investor sentiment.

Unease amid macroeconomic events has led to a sell-off in the sector, with some real estate shares seeing notable losses. While the S&P/ASX 200 Index (ASX: XJO) has slipped 4.2% lower in the past week, the real estate sector is 9.2% worse off.

In light of the situation, we are taking a look at three ASX property shares that are currently debt-heavy. As such, these companies could suffer further falls in the event of additional interest rate hikes.

Debt strapped property shares on the ASX

Before we dive into these companies, it is important to note that high debt levels don’t necessarily mean financial trouble is inevitable. At present, all three have interest payments ‘well covered’ by their earnings before interest and tax (EBIT).

Although, with debt-to-equity ratios above 50%, these ASX property shares are certainly in a more precarious position than they would be if debts were below 40%.

Centuria Office REIT (ASX: COF)

We begin with the least indebted ASX property share on our list, both in percentage and absolute terms. Centuria Office REIT is a real estate investment trust (REIT) operating under the guidance of Centuria Capital Group (ASX: CNI).

As of 31 December 2021, the office real estate-focused REIT recorded $810.22 million worth of debt on its balance sheet. This figure corresponds with a 54.5% debt-to-equity ratio, which is considered high. Even after cash is factored in, the net debt level is around 48%.

Despite this, analysts at Morgans are expecting a distribution of 17 cents per unit in FY23.

Cromwell Property Group (ASX: CMW)

The next ASX property share on our list is the ‘cheapest’ based on price-to-earnings (P/E) ratios. Global real estate fund manager Cromwell Property Group operates across Europe, Singapore, Australia, and New Zealand with a total of $12.1 billion in assets under management.

At the end of last year, Cromwell reportedly held $2.166 billion worth of debt on its balance sheet. This translates to an 80.3% debt-to-equity ratio, which reduces to 76.3% net of cash. Though, it is worth mentioning the group maintained a 22% profit margin during the depths of the pandemic.

Scentre Group (ASX: SCG)

Lastly, the final installment in our debt-burdened ASX property shares is Scentre Group. This real estate company is known for its portfolio consisting of 42 Westfield centres mostly scattered throughout Australia and New Zealand.

Scentre Group is the most debt-loaded out of our three shares, carrying a total of $15.918 billion worth of debt. Doing the sums, this works out to be a debt-to-equity ratio of 83% and 78% net of cash.

Fortunately for shareholders, the group has swung back into profitability after a difficult period in 2020. However, investors are understandably cautious about how higher interest rates might make operations more expensive for ASX-listed property shares like Scentre Group looking forward.

The post Feel the squeeze: 3 ASX property shares with a whole lot of debt appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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