ANZ’s Mohindra Sees Singapore REITs Weathering Rate Storm

ANZ Sees Singapore REITs Weathering Rate Storm
A woman walks towards the Louis Vuitton Island Maison, right, as the city skyline is reflected in the building's facade in Singapore. Photographer: Sam Kang Li/Bloomberg

Singapore’s property trusts, Asia’s second-worst performers this year, are well-positioned to weather an increase in interest rates as they diversify their funding sources, said Australia & New Zealand Banking Group Ltd.

The average debt maturity of Singapore REITs has risen to four to five years from three years, Rohit Mohindra, the head of real estate for Southeast Asia at ANZ, said in an interview in Singapore on June 27. Only about 7 percent of the debt issued by the island-state’s REITs needs to be refinanced this year, according to Mohindra.

The FTSE Strait Times Real Estate Investment Trust Index, which surged 37 percent in 2012, has lost 4.1 percent this year on concern higher interest rates would make it more difficult to raise funds. Between the Singapore-dollar bond market and banks, there is ample liquidity for REIT sponsors in Singapore to access capital from local and foreign banks, Mohindra said.

“Singapore REITs are very well positioned to weather the storm,” Mohindra said. “They have diversified and accessed the market repeatedly.”

Singapore’s REITs are the second-worst performers in Asia after those in South Korea when measuring total returns including dividends, according to data compiled by Bloomberg.

Singapore’s central bank uses the exchange rate rather than interest rates to conduct monetary policy, adjusting the pace of appreciation or depreciation against an undisclosed trade-weighted band of currencies by changing the slope, width and center of the band. A flatter slope allows slower appreciation or depreciation over time.

New Measures

Singapore on June 28 unveiled rules governing how financial institutions grant property loans to individuals, extending efforts to curb excessive price increases. The government also said today that home prices climbed to a record in the second quarter.

New government measures on home loans make so-called diversified and retail developers more attractive, analysts Desmond Ch’ng and Wilson Liew at Maybank Kim Eng Securities Pte said in a note to clients today.

U.S. Federal Reserve Chairman Ben S. Bernanke said June 19 the central bank may start dialing down its stimulus effort if the economy achieves sustainable growth.

“The catalyst event will be the news flow in the pickup in the economy, also in the U.S.” said Vikrant Pandey, a Singapore-based analyst at UOB Kay Hian Pte. “Because we derive our interest rates from there indirectly, if the U.S. data continues to be strong, then the Fed will let the interest rates rise sooner rather than later.”

Most Singapore REITs have a leverage level of about 35 percent, which is “prudent,” Mohindra said. Debt at Singapore’s 20 largest REITs is about S$24.1 billion ($19 billion) of which about S$1.6 billion needs to be refinanced this year, he said. The refinancing amount for next year is about S$4.5 billion, followed by S$7 billion in 2015, he said.

‘Rate Shock’

Companies in the property industry accounted for about 17 percent of the S$9.52 billion bonds issued in Singapore this year, said Mohindra. In 2012, sales rose 45 percent to S$32 billion from a year earlier, with real estate companies making up about a quarter of it, he said.

Property trusts in the island-state may have to diversify their funding sources as they aren’t prepared for an “interest rate shock,” Fitch Ratings said in March. The city’s REITs have been increasing short-term debt with record-low interest rates and face refinancing risks when borrowing costs rise, which may force them to sell assets or shares to boost their funding, according to the ratings company.

Singapore REITs, the biggest fundraisers in the city’s initial public offering market in the past year, had relied on short-term debt to reflect the length of commercial leases, Johann Kenny, director of corporates at Fitch said in March. Their funding costs in the past six years don’t reflect the challenges in a “normalized” interest rate scenario, he said.

Rising Yields

Yields on Singapore’s 10-year government bonds climbed to 2.77 percent on June 24, the highest since Feb. 9, 2011, according to data compiled by the central bank. The rates have gained 91 basis points since the end of March, set for the biggest quarterly advance in five years.

“REITs have already anticipated some of the rate increases and taken fixed rate debt versus floating, and have longer-dated tenures,” said UOB’s Pandey. “Some of the REITs have been oversold.”

Singapore REITs are trading at an average dividend per unit yield of 6.3 percent, 384 basis points above the Singapore 10-year government bond yield, Standard Chartered said in a note dated June 24.

“On their financing needs, they are OK,” Mohindra said. “Do higher rates influence their decision if they were to make a new acquisition? Yes, probably it does and hopefully it gets reflected in the terms and the price and the value that they pay for the asset and in terms of trying to pay for the higher cost of debt that they may use to finance that.”

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