This updated methodology supplements and aligns the structure to Scope’s ‘Corporate Rating Methodology’, updated on 11 November 2015. It includes the separation of competitive position and industry risks, with the latter being assessed in terms of cyclicality, barriers of entry and substitution risk. Furthermore Scope has sharpened the definition of key financial items/performance indicators in Appendix 1.

The methodology describes how Scope analyses corporate credit risk of property companies based on its assessment of business- and financial-risk profiles, complemented with an analysis of other key supplementary rating drivers, and applying to companies that generate the majority of their total revenues and funds from operations from rental income, as well as the development or trading of real estate.

“The real estate industry is a cyclical, capital-intensive industry with significant investment required to buy or maintain properties. Many real estate companies finance a large portion of their properties via debt and thus tend to have higher leverage than average industrial companies. However, this relatively high leverage is also frequently matched with relatively stable asset values, which can often be realised easily.” says Philipp Wass, industry expert of Scope’s corporate rating team. “Given the different national legislations, local market knowledge is important to succeed in the industry. Both the regional focus and cyclicality of the business makes it challenging for real estate companies to achieve ratings in the highest investment grade categories.”

To qualify for an investment-grade rating, a real estate company should have a high percentage of cash flows derived from letting activities, strong market positioning, broad geographical and sector diversification, a high-quality, granular tenant base and quality assets. Investment-grade real estate companies tend to have predictable cash flows, solid profitability and strong financial metrics.

In contrast, a high percentage of cash flows derived from development activities, weak competitive positioning compared to international peers, weak geographical and sector diversification, a high concentration of tenants, and lower asset quality can indicate a non-investment grade rating. Cash flows of non-investment grade companies tend to be less predictable, their profitability more volatile, and financial measures weaker.

The methodology update does not affect outstanding ratings.

The ‘Rating Methodology - European Real Estate Corporates’ is available at www.scoperatings.com, or by clicking on the link below.

‘Rating Methodology - European Real Estate Corporates’