Financial flexibility remains key for Singapore REITs

Source : Business Times – 29 Sep 2009

Singapore REITs (S-REITs) have, to a large extent, refinanced their maturing debt obligations in 2009 and have benefited from a recent share price recovery, though questions still remain regarding their financial flexibility and refinancing ability, notes Fitch Ratings in a new special report.

In the report, the agency discusses some of the aspects of S-REITs’ structures, highlighting its concerns, and discusses the impact of the financial crisis and the outlook for S-REITs and their ratings as they emerge from the crisis.

S-REITs have been negatively affected by the financial crisis as a limited availability of debt financing and stock price corrections forced them to restrict their previous aggressive asset acquisition programmes and concentrate on survival and tenant retention in a difficult market. S-REITs responded to the changing market dynamics by sourcing bank loans in advance for their refinancing and by reducing their capex and acquisition plans, and development pipelines; some S-REITs have successfully issued equity. These steps are positive, from a ratings standpoint, but do not address other aspects of the debt structure and liquidity profile on which Fitch continues to have concerns.

‘The requirement for S-REITs to distribute a major portion of their earnings affects their liquidity profiles. This coupled with concentrated debt maturity profiles can significantly increase the refinancing risk around S-REITs,’ says Peeyush Pallav, Director with the agency’s REIT team.

S-REITs are moderately geared at an average of 31.0% (as at June 2009) although industrial S-REITs are more highly geared at an average of 39.6% (as of June 2009). In the year ending June 2009, S-REITs have faced falling asset valuations as well, for instance, office S-REITs reported a 4.2% drop in total assets in the year ending June 2009, compared with an increase of about 54% in the previous year, while retail S-REITs added 1.5% to their total assets in the same period. Fitch does not expect leverage to increase significantly in the near term as S-REITs are currently focused on tenant retention and organic portfolio growth, and may only look to acquisitions when they become yield accretive.

The ability of S-REITs to access the capital markets and maintain adequate liquidity for their debt refinancing and capex requirements remains critical to their ratings outlook. ‘S-REITs would benefit from long term undrawn committed bank facilities, less reliance on secured financing and a wider spread of debt maturities to ensure debt refinancing funding is available even in the most difficult circumstances,’ adds Mr Pallav.

Fitch will continue to monitor the steps taken by S-REITs in the wake of the financial crisis, including their efforts to reduce debt concentration, acquire sufficient committed bank facilities and improve their liquidity profiles. Fitch’s overall outlook for the sector remains negative owing to negative asset performance expectations; however the sector’s credit performance is expected to be driven by the industry sub-sectors, and hence individual S-REITs may have different outlooks.