Singapore REITs to Vary Funds on Interest Rates: Southeast Asia

Singapore’s property trusts, the second-best performers in Asia in the past year, may have to diversify funding sources as they aren’t prepared for an “interest rate shock,” according to Fitch Ratings.

The city’s real estate investment trusts or REITs have been increasing short-term debt with record-low interest rates, according to Johann Kenny, director of corporates at Fitch. They face refinancing risks when borrowing costs rise, and may be pushed to sell assets or shares to boost their funding, he said.

“Singapore REITs are not really well equipped to withstand an interest rate shock,” Kenny said in a phone interview from Sydney yesterday. “When a rating agency looks at a company, we look at the long-run average through the cycle of the interest rate environment and we don’t see the current low interest rates as a sustainable model from a macro-economic perspective.”

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, Kenny said. Their funding costs in the past six years don’t reflect the challenges in a “normalized” interest rate scenario, he said.

The REITs raised S$3.4 billion ($2.7 billion), or 68 percent, of the S$5 billion of stock sold in Singapore IPOs in the past 12 months, according to data compiled by Bloomberg. The biggest share sale was the S$1.6 billion raised by Mapletree Greater China Commercial Trust, a REIT that owns assets including the Festival Walk shopping mall in Hong Kong and an office complex in Beijing. The trust, which was also Asia’s biggest share sale this year, surged 12 percent since its trading debut on March 7.

Singapore Returns

Singapore REITs posted a one-year total return of 45 percent, trailing Japan’s 63 percent in Asia, according to data compiled by Bloomberg. The measure tracking REITs in Singapore climbed 29 percent in the past year, compared with the 9.3 percent increase in the Singapore benchmark Straits Times Index.

Debt held by Singapore property trusts make up 31 percent of total assets, higher than the ratios for Hong Kong, Taiwan and South Korea, according to data compiled by Bloomberg. Still, it’s lower than the 39 percent for debt held by Australian REITs, or 44 percent for Japanese trusts, the data showed.

Moody’s Investors Service said today it upgraded the ratings for unsecured debt issued by CapitaMall Trust, CapitaCommercial Trust and Ascendas Real Estate Investment Trust.

Refinancing Strength

The measure of secured debt relative to cash and the value of its investment properties’ for 12 Singapore REITs tracked by the rating company fell to 11 percent last year, from 21 percent in 2007, said Jacintha Poh, a Moody’s analyst in Singapore. That may decline to 9 percent by the end of this year, she said.

Another gauge tracking pretax earnings to interest costs also remained stable over the past six years, indicating the REITs are able to weather changes in borrowing costs, Poh said in an interview.

“The REITs have a track record and what we want to focus on is their strength in refinancing,” Poh said, pointing to the S$5.89 billion of debt and equity raised during the 2008-2009 financial crisis.

Singapore’s REITs have extended the maturity of loans since the financial crisis, when almost 50 percent of their debt was due in 1 1/2 years, according to Vikrant Pandey, a Singapore-based analyst at UOB Kay Hian Pte.

“REITs have diversified their sources of funding and extended debt maturities,” Pandey said. Still, “their basic model is perpetual refinancing of debt -- there is no repayment of debt in the REIT model so you have that risk of refinancing.”

Conservative Bias

ARA Asset Management Ltd., which manages about S$22 billion of assets through property trusts and funds, said it plans to avoid the missteps by some competitors during the financial crisis when they took on too much debt. The company, which has almost no leverage, is seeking to double its assets over the next five years through acquisitions.

“Our strategy is not an aggressive, highly-leveraged, exotic trading investing strategy,” Moses K. Song, chief investment officer at ARA Asset, said in an interview in Singapore on March 11. “We don’t want our investors to be concerned that management is going around and trying to sort out its own balance sheet issues. If there’s a bias, it’s to be conservative.”

The company’s Fortune REIT is the best performer on the Singapore REIT index in the past year, rising 68 percent, followed by Frasers Commercial Trust. Ascendas India Trust was the only stock on the gauge to drop, falling 1.2 percent.

A total of 30 REITs and property trusts were listed in the city-state with a combined value of S$56 billion, making up 6 percent of the total market capitalization of stocks traded, Lawrence Wong, head of listings at the Singapore Exchange Ltd., said in a statement on Feb. 27.

“Currently, Singapore REITs have a stable operating environment which won’t change over a 12-month period,” Fitch’s Kenny said. “What we are flagging here is on the leverage and liquidity. Their dependence on bank debt means they don’t really have potential from an interest rate perspective to sustain a massive shock in interest rates.”

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