The Straits Times | Mar 20, 2013
Real estate investment trusts (Reits) have been pulling back for the past five trading sessions as new concerns surface over their financing risks.
The FTSE ST Reit Index lost 0.14 per cent yesterday to take its five-day decline to 1.49 per cent, although it is still up 3.48 per cent this year.
Over the past 12 months, the Reit index has added 28.91 per cent, far outperforming the 9.33 per cent increase in the benchmark Straits Times Index.
Yield-hungry investors have shown a ferocious appetite for the trusts, but they might have a re-think after a Monday report by ratings agency Fitch suggested that the financial risk profile of Singapore Reits is expected to deteriorate.
"The availability of low-cost debt and the demand for dividend distributions in an environment of falling asset yields are leading to an increasing use of debt in Singapore Reit funding mixes," said Fitch. "The increasing leverage of Singapore Reits poses several risks to the sector, including refinancing risk and exposure to interest rate shocks."
Fitch's director of corporates, Mr Johann Kenny, told Bloomberg that Reits in Singapore will face refinancing risks when borrowing costs rise, and may be pushed to sell assets or units to boost their funding.
"Singapore Reits are not really well-equipped to withstand an interest rate shock," he said. "When a ratings 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."
He said funding costs for Reits over the past six years - a period of extremely low interest rates - do not reflect the challenges in a "normalised" interest rate environment.
Fitch also said Reits will have to compete for assets, which will depress underlying asset yields and feed into the negative trend.
The agency also highlighted the increasing supply of properties and falling absorption rates.
These threaten to raise vacancy levels, although "this risk is mitigated by the improving revenues and profitability of the Singapore Reit sector that are underpinned by the strong economic fundamentals of Singapore".
In a report yesterday, fellow ratings agency Moody's Investors Service noted that Singapore Reits have in recent years been shifting away from secured debt - backed by the property as collateral - towards unsecured debt.
"Moody's believes that this trend is sustainable, as Reits are expected to continue to opt predominantly for unsecured debt financing," it said in a statement.
Moody's analyst Jacintha Poh said the ratio of secured debt to total deposited assets - this includes the property values and cash held by the firm - of investment-grade Reits fell from 21 per cent in 2007 to 11 per cent at the end of last year.
She expects the ratio to drop to 9 per cent by the end of this year.
Moody's upgraded issuer ratings for some Reits that reduced their secured debt to levels that no longer put unsecured creditors in a significantly weaker position within the overall debt structure.
Ms Poh noted that Reits have been able to acquire unsecured funding due to strong liquidity and low interest rates, conditions that are expected to continue for the next 12 to 18 months.
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