Industrial REITs – BT

Industrial S-Reits’ expansion into China poses risk: Moody’s

AS industrial Singapore real estate investment trusts (S-Reits) look at spreading their wings to China, Moody’s Investors Service (MIS) has cautioned about the legal and regulatory risks they face.

In a report on the business risks which industrial S-Reits will face in China, associate analyst Alvin Tan of MIS, a wholly owned credit rating agency subsidiary of Moody’s Corporation, said: ‘Moving into China would have negative credit implications, given the uncertainties associated with entering an unfamiliar market and the associated regulatory risk, which could nullify the potential gains of geographical diversification.’

Mr Tan said that China’s financial, tax, and legal frameworks are still in their infancy, which could have a number of negative ramifications, such as the regulatory risk related to tax policies on profits, the enforcement of lease contracts, and land ownership issues, as well as foreign-exchange risk for the repatriation of capital.

On why industrial S-Reits are seeking expansion into new regions, the MIS report said the competition for industrial properties in Singapore is intensifying. S-Reits’ growing risk appetite and the low interest rate environment have exacerbated the competitive pressure.

Another push factor is that the large supply of new industrial properties opening up over the next two years may limit rental growth in the medium term.

‘In their search for higher yields, the industrial S-Reits are now looking at expanding into new regions,’ said Mr Tan, ‘with several of the S-Reits identifying China, the world’s fifth most active real-estate investment market, as a possibility.’

There are of course ‘positive factors’, said Mr Tan, but they ‘could mitigate, but not fully offset, the impact of these negatives’.

The merits of overseas diversification include lessening the S-Reits’ geographic exposure to Singapore. And those with sponsors that have already established a presence abroad could tap into their sponsors’ China-related experience to reduce the risk associated with operations in a complex regulatory environment.

Also, the acquisition of overseas properties with long-term leases and rental guarantees would provide additional income and stability to medium-term operating results.