Real Estate Investment Trusts

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S’pore Reits face credit ratings pressure: Moody’s

They are affected by tighter conditions for borrowing

SINGAPORE’S real estate investment trusts’ (Reits) credit ratings will face pressure in the next 12 to 18 months because of their rising difficulty in raising funds from debt and equity markets, according to Moody’s Investors Service.

Moody’s has cut or put on review for possible downgrade the ratings of Allco Commercial Real Estate Investment Trust, Macquarie MEAG Prime Reit and CapitaCommercial Trust in the first quarter to reflect growing risk to the debt of the trusts.

‘Tighter conditions for borrowing has adversely affected both the availability and price of credit at a time when a number of Singapore Reits face imminent refinancing needs,’ Moody’s analysts led by Singapore- based Kathleen Lee write in a report.

‘In addition, the depressed unit prices of many trusts have reduced the attractiveness of equity funding.’

Unit prices of Singapore’s Reits have slumped to trade at 15 per cent to 30 per cent of their net- asset values, according to the rating assessor. Mapletree Logistics Trust, which owns industrial buildings, called off a plan to raise as much as $500 million through a rights offer in January because of volatile market conditions.

Singapore’s Reits are also paying more to get bank loans or sell bonds as the commercial mortgage- backed securities market remains shut.

In the first quarter, banks in Singapore raised interest spread by between 0.5 and one percentage point for short-term or refinancing loans, Moody’s said.

‘Many Singapore Reits are relying more heavily than in the past on bank lending,’ the analysts write.

‘Previously, some Singapore Reits had not spent sufficient time cultivating strong bank relationships because, in the past, they had enjoyed easy access to equity and commercial mortgage-backed securities funding.’

CapitaMall Trust and CapitaCommercial, both managed by CapitaLand Ltd, South-east Asia’s biggest developer, have sold six bond deals this year, raising a total of $1 billion at yields ranging from 2.8 per cent and 3.2 per cent, data compiled by Bloomberg show.

Suntec Real Estate Investment Trust, controlled by Hong Kong billionaire Li Ka-shing, raised $270 million from a five-year convertible bond sale in February, paying a 4.25 per cent yield, compared with its average financing cost of 3.1 per cent in 2007, Moody’s said.

Smaller Reits are becoming increasingly likely to be acquired by their bigger rivals in the remainder of the year because of limited access to funding, according to Moody’s.

‘Such a consolidation would leave a sector with the bigger entities having greater financial capacity to expand abroad,’ the analysts say. — Bloomberg

Moody’s Sees Negative Outlook For Singapore REITs

The following is a press release from Moody’s Investors Service:

Singapore, May 22, 2008 — Moody’s Investors Service has a negative rating outlook for Singapore’s real estate investment trusts (S-REITs) over the next 12-18 months.

Despite overall sound fundamentals, negative market sentiment and tighter market liquidity have impaired the access of some issuers to the capital markets, Moody’s says in a new report.

The report is entitled “Singapore Real Estate Investment Trusts (S-REITs): Short-Term Refinancing Risks and Uncertain Capital Markets Weigh on Sector,” and is authored by Kathleen Lee, a Moody’s Vice President/Senior Analyst, and Kaven Tsang, an Assistant Vice President/Analyst.

“Materially tighter credit conditions are adversely affecting both the availability and price of debt at a time when a number of S-REITs face imminent refinancing needs,” says Lee, who is the lead author.

“At the same time, depressed unit prices of many trusts have reduced the attractiveness of equity funding and boosted leverage at some entities as they fund already committed acquisitions,” Lee adds.

As a result of these challenges, Moody’s in recent months has downgraded or put on review for downgrade three S-REITs and set outlooks for two others to negative.

“As we look ahead, difficult market conditions have increased the likelihood of event risk affecting credit profiles through merger or divestiture activity”, Lee says, “Better-off S-REITs may take advantage of the attractive valuations of those peers that face liquidity problems or trade at high discounts to net asset value.” She adds, “Likewise, some entities may reconsider their strategic profiles to realize greater value for their unit holders.”

Tsang says, “At the same time, the fundamentals of Singapore’s property market remain firm as high occupancy rates support yields and cash flows.” He adds, “Most S-REITs retain good quality assets that will allow them to benefit from this trend.”

In addition, the report notes that Singapore’s economy is slowing but still solid and an easing in benchmark interest rates following the U.S. lead and the continued strong inflow of foreign funds should provide ongoing support to the sector’s fundamentals.

The report is available at www.moodys.com.

Switch to S-Reits for their defensive nature: analysts

AGAINST the backdrop of uncertainty facing property developers, analysts advocate taking defensive positions in real estate investment trusts (Reits).

While there have been concerns about Reits as the credit crunch dried up their acquisition activity in the past six months, these worries now pale in the face of weightier concerns about slower home sales and falling home prices surrounding developers.

‘We believe the Singapore residential property sector could see a bursting of a bubble that has been created from exuberant expectations and liquidity over the past two years,’ Credit Suisse analysts said in a report this month. ‘We advocate switching from riskier residential exposure to S-Reits.’

Echoing these views are CIMB-GK analysts Donald Chua and Janice Ding. In a report yesterday, they said: ‘We remain confident in S-Reits for their defensive nature and attractive yields of 6.2 per cent on average and general positive outlook for property rents in the medium term.’

In particular, CIMB-GK prefers Reits with larger asset portfolios that can provide sustainable and stable income streams, experienced management teams with established track records and strong sponsors with quality assets to inject into the Reits.

‘We are also more inclined towards Reits with material Singapore-based assets in view of the strengthening Sing dollar,’ the CIMB-GK analysts said.

This makes industrial and retail Reits the brokerage’s top picks, given their defensive and stable income, and hospitality Reits in view of rising demand and rents.

Even though industrial rents rose some 32 per cent last year, they are still about 30 per cent below their peak in 1996. Hence, the analysts reckon there is still room for stronger catch-up in industrial rents as Singapore’s manufacturing moves towards knowledge-based industries such as research and development and the biomedical sector.

In addition, the longer weighted average leases for industrial space and the lower likelihood of industrial tenants terminating their leases before expiry give industrial Reits further defensiveness in their income stream.

Elsewhere, retail rents have shown the greatest resilience during economic downturns, and tenants also showed the least propensity for cutbacks in demand for space in poor economic conditions, the CIMB-GK analysts said. Efforts by the government to boost Singapore as a financial and tourism hub also bode well for the retail sector.

They noted that between the last rental peak in 1996-1997 and the rental trough in 2003-2004, retail rents fell the least – by 34 per cent, compared with 45 per cent for industrial rents and 54 per cent for office rents.

‘Furthermore, the retail segment also has the greatest potential to grow organically via enhancements to facades, layouts and tenant mixes,’ they added. ‘This trait further enhances the defensive nature of retail Reits, particularly when prices may not be conducive and funding for acquisitions may not be readily available.’

Credit Suisse analysts also favour retail Reits for their more defensive nature, particularly CapitaMall Trust and Frasers Centrepoint Trust.

For investors with a higher risk appetite, CIMB-GK analysts recommend hospitality Reits, which hold growth potential from expected increases in business and leisure travel but are seen to be most vulnerable to external risks.

In contrast, the outlook for property developers is more clouded. CIMB-GK said its models have factored in 10-20 per cent declines in property prices in the mid-luxury segment, but it has upgraded its rating on the sector to ‘neutral’ from ‘underweight’ due to current low valuations.

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