Call to make refinancing of debt easier for S-Reits

Source : Business Times - 15 Nov 2008

ARA CEO John Lim suggests regulatory reviews to relax bank lending to S-Reits for the next few years to tide them over liquidity issues
ARA Asset Management Group CEO John Lim would like to see refinancing of debt being made easier for Singapore real estate investment trusts (Reits). ‘The whole S-Reit market is oversold. The biggest fear, besides the issue of valuation of assets, is the refinancing of debt,’ he told BT in a recent interview. ‘In 2009 alone, you have $4.6 billion of debt for refinancing. In the next four years, it may be close to $20 billion including rollover debt. The issue is very real.’
Mr Lim made a few suggestions involving a regulatory review to relax bank lending to S-Reits for the next few years to tide them over liquidity issues.
One suggestion would be for the Monetary Authority of Singapore to consider lifting the cap limiting banks’ exposure to property development and investment activity - excluding owner-occupied residential mortgages - to 35 per cent of total non-bank loan and credit exposures, under Section 35 of The Banking Act.
‘But if that is not possible, why don’t they consider exempting Reits from Section 35 for Singapore banks?’ Mr Lim asked. Arguing the case for this, he said risks are relatively low for S-Reits, which are generally conservatively geared at between 30 and 40 per cent, while those geared above 35 per cent have to be rated, so the risk is reflected in the rating. ‘As a quid pro quo (for exempting S-Reits from the Section 35 limits), Reits may have to accept a lower gearing limit,’ he suggested. ‘So we would not be putting any additional risk on to the banking sector.’
Under current rules, a Reit’s aggregate leverage limit is 35 per cent of its deposited property if the Reit is not rated, with a higher 60 per cent limit if a credit rating for the Reit is obtained and made public.
Last month, Monetary Authority of Singapore deputy chairman Lim Hng Kiang told Parliament that most banks are significantly below the Section 35 limit and the aggregate banking system’s exposure here is just 15 per cent.
A banking source said that although most banks may be well below the Section 35 limit, they may be prudent and set their own internal limits that may be below that stipulated by MAS.
ARA’s Mr Lim has another suggestion on his wish-list to alleviate refinancing issues for S-Reits: Perhaps MAS could set up a temporary relief fund line of, say, $10 billion - managed by the banks - to provide refinancing to S-Reits in the next few years.
He stresses that he is not making his various suggestions for the benefit of the Reits managed by ARA, such as Fortune and Suntec Reits, but out of concern about the fate that may befall smaller Reits without strong sponsors if they fail to secure refinancing deals. ‘We don’t want to see even a single Reit fail,’ he said. ‘Because when even a small Reit fails, in today’s market, confidence in the whole S-Reit sector will collapse. It would be the same phenomenon as Lehman Brothers.’
If Reits cannot refinance their debt, they may be forced to sell assets on the cheap in a weak property market to repay their loans or do a rights issue at a huge discount that could potentially cause earnings dilution. ‘Either way, that is going to destroy value,’ said Mr Lim
Privatisation is another possibility Mr Lim envisages, given that S-Reits are trading at huge discounts to net asset value (NAV) - on a sector average basis, at over 50 per cent. Market watchers suggest that a way out for weaker Reits with refinancing issues could be to issue new shares to new cornerstone investors who may come on board with an eye on taking the Reit private later.
Giving his take, Mr Lim said: ‘If you’re trading at 80 per cent discount to NAV, or 50 or 60 per cent discount and you have a good bunch of assets, privatisation is definitely a viable (exit) option for shareholders, although it may not be fair value for long-term investors.’
Once a Reit is privatised, it would become a privately held property fund, and this would reduce the number of S-Reits trading on the Singapore Exchange. ‘So privatisation won’t be good for the Reit industry because you have fewer Reits,’ Mr Lim said. Market watchers say another big worry for S-Reits is that they are staring at write-downs on the value of their properties.
Lowering the value of properties would raise their gearing ratios - borrowings to value of property - and create challenges for Reit managers. They may have to resort to selling assets to repay borrowings or recapitalising by issuing new units and using the equity raised to trim debt. But this would have to be at discounts to market price to lure investors, and the additional units could dilute earnings.
Mr Lim acknowledges his suggestions on reviewing regulatory limits on property sector lending by banks won’t be a panacea for problems facing the S-Reit industry ‘but at least you give more avenues available for the industry so the chances of the worst scenario happening are less’.
ARA Asset Management, the only property fund management outfit listed on the Singapore Exchange (SGX), was set up by Mr Lim and Cheung Kong Holdings in 2002 and floated in November last year. Today it has $12 billion of assets under management. Mr Lim owns about 36 per cent of ARA. He lamented that ARA, a publicly listed property fund manager that manages six funds, is trading at six times price-earnings ratio, while recent deals involving unlisted managers of single Reits have been at a much higher 15 to 20 times. ARA manages four Reits - Suntec and Fortune listed on SGX, Prosperity Reit in Hong Kong and AmFirst listed on Bursa Malaysia - and two private property funds. The two private funds are ARA Asia Dragon Fund, which counts Calpers as anchor investor, and ARA Asian Asset Income Fund, a smaller fixed-income fund that invests in Reits, listed infrastructure and utilities trusts in Asia.
Mr Lim, 52, has more than 27 years’ experience in the real estate business, of which 13 have been in the property fund management industry. The avid 12-handicap golfer is an engineer by training. His first job was with the former DBS Land, where he worked for nine years. He later joined Singapore Labour Foundation Management Services, where he was general manager. He was also executive director at GRA (Singapore), today known as Pramerica Real Estate Investors (Asia). Mr Lim also sits on the Finance Ministry’s Valuation Review Board.