Scope Ratings (‘Scope’) has today published its guidance for the rating of European Real Estate Corporates. This guidance supplements the Corporate Rating Methodology published on 17 September 2014. It describes how Scope assesses industry-specific risk drivers and credit measures of European real estate corporates in the context of its rating analysis.

The methodology guidance applies to companies that generate the majority of their total revenues and Funds from Operations (‘FFO’) from rental income, real estate development or real estate trading activity.

“The characteristics of real estate corporates call for a specific rating approach” says Dr. Britta Holt, Head of Scope’s Corporate rating team. “Real Estate Corporates tend to have higher leverage levels than average industrial companies but often also have a valuable asset base”.

Parameters which can qualify a real estate company for an investment grade rating are a high percentage of cash flows derived from letting activities, a strong market positioning, a wide geographic and sector diversification, a high quality, granular tenant base and good quality assets. The cash flows of investment grade companies tend to be well predictable, while these companies benefit from a solid profitability and strong financial measures.

In contrast, a high percentage of cash flows derived from developing activities, a weak competitive positioning compared to international peers and a weak geographical and sector diversification as well as a high concentration of tenants and a lower asset quality can be indicators for a sub-investment grade rating. The cash flows of non-investment grade companies tend to be less predictable, while these companies often have a volatile profitability and weaker financial measures.

The report “Methodology Guidance for European Real Estate Corporates” is available at www.scoperatings.com or by clicking on the link below.

Download Real Estate Methodology Guidance

Download Corporate Rating Methodology