S-Reit outlook still negative: Fitch

Source : Business Times – 30 Sep 2009

This despite better share prices and refinanced debt

SINGAPORE-listed real estate investment trusts (S-Reits) have mostly refinanced their maturing debt obligations this year and have benefited from a recent share price recovery, noted Fitch Ratings in a new special report. But questions still remain regarding their financial flexibility and refinancing ability, the ratings agency said.

Fitch is also maintaining its overall negative outlook for the sector, owing to negative asset performance expectations. However, the credit performance of the sector is expected to be driven by the industry sub-sector, hence individual S-Reits may have different outlooks.

The report noted that 12 out of 20 S-Reits, for which information was publicly available, reported a decline in the value of total assets as at end June 2009, from a year ago, largely on the back of falling asset prices and write-downs. Office S-Reits, in particular, reported a 4.2 per cent drop in total assets in the year ended June 2009, compared with an increase of about 54 per cent in the previous year, while retail S-Reits added 1.5 per cent to their total assets in the same period.

S-Reits, like property-related companies globally, have been buffeted by the global financial crisis, Fitch noted.

‘A limited availability of debt financing and stock price corrections have forced S-Reits to restrict their previous aggressive asset acquisition programmes and concentrate on survival and tenant retention in a difficult market,’ noted the report.

But S-Reits responded to the changing market dynamics by sourcing bank loans in advance for their refinancing, and reducing their capex and acquisition plans as well as their development pipelines. Some S-Reits also successfully issued equity. But while these steps are positive from a ratings standpoint, they do not address other aspects of the debt structure and liquidity profile on which Fitch continues to have concerns.

‘In addition to dealing with a worsening asset performance, S-Reits are expected to tread cautiously in terms of their debt maturity profiles and liquidity provisions,’ said the report. ‘S-Reits will also need to improve their liquidity profiles as they come out of the crisis, to meet their debt refinancing requirements in the short to medium term.’

The requirement for S-Reits to distribute a major portion of their earnings affects their liquidity profiles, said Fitch. This, coupled with concentrated debt maturity profiles, can significantly increase the refinancing risk around S-Reits.

Looking ahead, S-Reits are now expected to continue their moderate leverage stance, but shift their focus to enhancing their capital markets reach. ‘They are likely to concentrate more on improving their debt maturity profiles, and expanding their relationships across banks to improve access to the bank loans’ market,’ said Fitch.