Link :- http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid=%7b967180815-11079-4226146935%7d&print=1
DEBT worries are emerging over some high-flying Singapore real estate investment trusts (Reits) which have borrowed heavily at rock-bottom interest rates to add properties to their portfolios.
These Reits have gone on a borrowing spree to make acquisitions offering high rental income, which in turn translates to higher payouts to unit holders.
But debt is now a dirty word in the wake of the growing credit crunch in Europe, which is forcing European banks - a major source of funds for regional borrowers - to scale back on their lending.
These worries have reverberated among investors in Reits.
Since Aug 1, the FTSE ST Reit Index has fallen by 13.2 per cent.
But some Reits have suffered much steeper falls. Suntec Reit has plunged 25.1 per cent, K-Reit has nose-dived 28.5 per cent and Ascott Residence Reit has slumped 16 per cent.
Flagging its concerns recently, credit rating agency Moody's said that while it has a 'stable outlook' for Singapore Reits, the risks are apparent.
'A slowdown in Singapore's GDP growth, coupled with a large supply of new properties coming on-stream, should dampen rental growth, while debt-funded acquisitions have led to increased leverage for several S-Reits,' it noted in a report last week.
Deutsche Bank analysts Elaine Khoo and Gregory Lui noted in a report on Monday that while liquidity is still available in the Singapore dollar bond markets, the spreads have started to trend up.
'Fixed income investors are increasingly focusing on absolute yields, unlike bank financing, which is based purely on credit assessment,' they added.
The yield is also being driven up by competition which S-Reits are facing from Hong Kong giant conglomerates such as Cheung Kong and Wharf that have turned to Singapore to raise funds.
Still, some analysts are confident S-Reits will ride out any credit crunch triggered by the euro zone debt crisis far better than in the global financial crisis three years ago when they were hammered.
'When markets turned the corner in August, the more volatile names such as office and hospitality Reits saw their stock prices falling sharply, with some falling up to 30 per cent on fears of revisiting the sub-prime days,' said Credit Suisse analyst Yvonne Voon in a report last week.
'However, we believe this time, it is going to be different, as we do not expect S-Reits to revisit sub-prime troughs, where some traded down to 0.2 times price-to-book, due to their stronger balance sheet and a generally better economic outlook,' she added.
Separately, CIMB analysts Janice Ding and Tan Siew Ling argued in their analysis of S-Reits debt that the sector is in a much stronger capital position now than it was in 2008.
'After the global financial crisis, S-Reits have drawn on the lessons learnt to take advantage of the low interest rates to lengthen their debt maturities. Most of them do not have major refinancing needs until 2013,' they added.
Short-term debt - the scourge which took S-Reits to their knees three years ago, is only 8 per cent of total debt, down from 38 per cent in June 2008.
They said the biggest threat facing S-Reits is a drop in valuation of their assets which may, in turn, cause their debt-to-asset ratio to soar.
'We stress-test the asset leverage of 15 S-Reits and identify Ascott Residence Trust, Mapletree Logistics Trust, K-Reit and Suntec Reit as the most vulnerable to potential falls in asset value.'
But UBS analysts Michael Lim and Adrian Chua noted that at current price levels, S-Reits offer an attractive yield of 7.1 per cent.
'We expect S-Reits dividend per unit's growth at 1.2 per cent per annum with retail and hospitality Reits leading the growth at 4.4 per cent and 2.4 per cent respectively,' they added.
engyeow@sph.com.sg
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