SREITs – BT

Moody’s revises S-Reit outlook to stable from negative

Rental decline in office, retail and industrial sectors slowing down

MOODY’S Investors Service has revised its outlook for Singapore’s real estate investment trusts (S-Reits) to stable from negative, reflecting its view that the sector’s fundamental credit conditions will neither erode nor improve materially over the next 12 to 18 months. ‘The stable outlook is supported by three primary factors: the strong rebound in Singapore’s economy; the stabilisation of rents across the retail, office and industrial property sub-sectors; and the steady performance and lower refinancing risk of the rated S-Reits,’ said Peter Choy, a Moody’s vice-president and senior credit officer.

Moody’s is bullish as it feels the rental decline in the office, retail and industrial sectors is slowing down.

‘Although developers are launching a strong supply of office, retail and industrial properties in Singapore during the rest of 2010 and into 2011, the downward adjustment in rents of the last 12 months has already – and substantially – reflected the coming increase in inventory,’ said Mr Choy. ‘We therefore expect a slowing in the decline in rents for these sectors.’

Most S-Reits also saw some improvement in their first-quarter revenue year on year, Moody’s noted. Its report also pointed out that since the second half of 2009, S-Reits have taken action to improve their capital structure.

In addition, the decline in acquisitions has alleviated the need for short-term bridging loans.

As a result, the amount of debt maturing in 2010 is quite low. Those S-Reits with a higher amount of debt falling due in 2011 have already proved their ability to refinance their debt during challenging conditions, as they did in 2009, Moody’s said.

But in a separate report, Fitch Ratings pointed out that recent Australian acquisitions made by a few S-Reits come with some risks.

Fitch said that while there are benefits to offshore acquisitions – in terms of geographic and cashflow diversification – such expansion needs to be managed well from a property management viewpoint and with prudent balance sheet management.

Recent Australian acquisitions by S-Reits have spanned sectors across hotels retail, and office properties. Notable deals in Q4 2009 and Q1 2010 include CDL Hospitality Trust’s purchase of several Australian hotels, K-Reit Asia’s acquisition of a 50 per cent interest in an office building in Brisbane and Starhill Global Reit’s acquisition of the David Jones building in Perth.

‘S-Reits are expected to benefit from a more diversified cashflow arising from their Australian acquisitions, reducing their reliance on cashflows from a single market in Singapore,’ said Peeyush Pallav, a director with Fitch’s Reit team. ‘Furthermore, outside of Singapore, Australia benefits from a well-established legal framework and liquid property markets in comparison to many other Asian countries.’

But the impact of Australian acquisitions on the S-Reits’ credit profiles is expected to be varied – depending on the assets acquired and the funding, hedging and property management strategies adopted, Fitch added.

And while such expansion brings benefits such as cashflow and tenant diversification, it also increases the risks in terms of newer markets potentially less understood by external investors and exchange rate volatility that can impact capital values and income streams, Fitch warned.