SREITs – BT

Stable outlook for S-Reits: Moody’s

CREDIT rating agency Moody’s Investors Service has maintained its stable outlook on real estate investment trusts in Singapore (S-Reits) over the next 12-18 months, on expectations of rising rents and loose credit conditions.

That many rated S-Reits carry investment-grade ratings ‘reflects issuers’ relatively stable operating incomes, high-quality assets, and low development risk’, said Moody’s analyst Alvin Tan in a report yesterday.

Moody’s expects Singapore’s economy to expand by 6.3 per cent this year, which should lead to increasing rental rates and high occupancies.

It noted, however, that the rate of rental hikes could be slower than that previously. This year’s economic growth is likely to pale in comparison to last year’s 14.5 per cent and a supply of new properties will also be coming onstream.

‘In our base case assumptions, we expect rental rates in the suburban retail and industrial segments to remain stable in 2011 and 2012, due to Singapore’s moderate economic growth and these rentals’ relative stability during the last economic downturn,’ Mr Tan said. In contrast, rents for the urban retail and commercial segments are expected to be more volatile, he said.

Apart from rising rents, a benign environment for refinancing will also benefit S-Reits, Moody’s noted. There is ample liquidity in the market and strong backing from sponsors for most S-Reits, Mr Tan said, adding that Moody’s expects interest rates to continue staying low this year.

He pointed out that most S-Reits have kept leverage in the 30-40 per cent range, which still compares favourably with their higher long-term targets of 40-45 per cent. Moody’s expects S-Reits to continue making acquisitions, funding these with a mix of debt and equity, while maintaining gearing within targeted limits.

‘We view industrial S-Reits, such as A-Reit (Ascendas Reit) and MLT (Mapletree Logistics Trust), as more likely to pursue growth by acquisition, because industrial properties have lower transaction values and higher yields compared to other asset classes,’ Mr Tan said.

‘By contrast, S-Reits focused on office properties continue to face challenges in finding yield-accretive properties due to high asking prices and low yields in this segment of the market.’