Relief as credit eases for Reits

Source : Straits Times – 19 Jun 2009

REAL estate investment trusts (Reits) are beginning to recover from the economic slowdown, thanks to an easing of credit conditions which has allowed vital bank funding to flow more easily.

Within the last month or so, at least four Reits in Singapore have had their existing debt facility extended or have managed to refinance maturing loans.

MacarthurCook Industrial Reit and Frasers Commercial Trust have managed to extend the maturity date of their existing loans.

And CapitaCommercial Trust and Suntec Reit have secured fresh loan facilities of $160 million and $825 million, respectively.

Reits pool money from investors to use in buying, renovating and managing income properties such as office buildings, shopping malls, warehouses and mortgages, among other things.

The fear that Reits would be unable to secure sorely needed fresh funding from banks had hung like a dark cloud over the sector last year as financial markets took a bad battering.

Industry watchers estimate that more than $4 billion in Singapore Reit debt is due for refinancing this year, with a further $12 billion due next year.

It has not helped that the market has tanked for commercial mortgage-backed securities (CMBS) – a type of bond backed by mortgages on commercial property. Some Reits use such instruments to get liquidity.

‘The CMBS market is totally dead,’ said Mr Mark Pawley, a former Credit Suisse investment banker and now chief executive of private equity firm Oxley Capital.

That the drought for new loans and refinancings is finally breaking is positive news for the Reit market – but the restoration of good credit health is coming at a cost as banks price higher spreads into funding arrangements.

‘With the revisions in valuations due to external factors, bankers are demanding fresh equity and higher pricing, which is generally what has been and is occurring,’ Mr Pawley said.

Despite declining occupancy rates and lower rental renewal rates at some of the premises owned by Reits that have clouded their prospects in recent months, banks are finally coming to their aid – after showing reluctance to do so as recently as several months ago.

‘Somebody has to refinance one way or another,’ said Dr David Lee, managing director of Ferrell Asset Management, a hedge fund that has also ventured into developing properties.

‘Like the paradox of thrift, financial institutions also suffer from paradox of tight credit. If every bank tightens the credit and lowers valuation, everyone is worse off.’

Kim Eng analyst Goh Han Peng said: ‘Only the larger Singapore Reits which are endowed with quality assets and backed by entrenched sponsors will be able to access the capital market at reasonable costs.’

Strong sponsors – Mapletree Investments, for example, sponsors Mapletree Logistics Trust – could act as ‘lender of last resort’ for Reits and prevent any fire sale of assets.

Some Reits which relied too heavily on CMBS loans to finance expansion during the boom years are also feeling the brunt of the moribund market.

One of them is Saizen Reit: When it was building up its portfolio in the years leading up to its 2007 listing, Saizen relied heavily on CMBS loans.

It now has to draw on cash reserves, proceeds from a rights issue as well as short-term bridging loans to pay off these loans.

Then there is Ascendas Reit, which has $300 million of CMBS debt due for refinancing in August.

Despite the challenges, the Reit market offers opportunities for investors, said venture capitalist Finian Tan, who was part of the listing team of Cambridge Industrial Trust.

‘The risk reward of buying Reits is still a good bet. The yields are still pretty good, even after taking into consideration the potential drop in yields due to increased cost of financing and lower rentals,’ he said.