Scope Ratings GmbH (Scope) has today published its updated rating methodology for European Real Estate Corporates. The update provides increased transparency and a detailed presentation of Scope’s analytical approach for assigning credit ratings to real estate corporates. The update does not entail any changes to the essence of Scope’s analytical framework.

Scope invited market participants to comment on the methodology by 25 February 2024. Scope has not received comments from market participants. The methodology is now final.

The updated methodology can be downloaded here.

Summary of key changes

The updated methodology includes the following adjustments to increase the transparency of the rating process:

• Aligning the industry risk matrix to that of the General Corporate Rating Methodology;
   
• Clarification on the weighting of the business and financial risk profile for different rating categories;
   
• Further guidance on how to assess sub-elements of an issuer's competitive position;
   
• Clarification on how to assess the diversification of property developers;
   
• Clarification on how to assess low levels of interest rate hedging and/or relatively short weighted average debt maturity profiles;
   
• Clarification on how to consider Scope-adjusted debt/EBITDA when assessing the leverage of buy-and-hold business models;
   
• Guidance on how to consider capital intensity in the sector, including related access to funding and capital;
   
• More detail on how to assess liquidity in the sector;
   
• Clarification on how to measure the ESG compliance of an issuer's property portfolio and the associated impact on its issuer and debt ratings;
   
• More detail on how to calculate the unencumbered asset ratio;
   
• Providing three examples to better understand the recovery analysis for non-investment grade issuers; and
   
• Minor editorial changes

Rating impact

The updated methodology might have a negative impact of up to one notch on outstanding ratings for one issuer.