Singapore REITS gearing up to buy more properties

» Continued rise in rental rates and occupancies. We base our stable outlook for the SREIT sector on the expectation of continued economic growth in Singapore over the next 12-18 months, leading to increasing rental rates and high occupancies. However, a slowing of Singapore’s GDP growth to an estimated 6.3% in 2011 from 14.5% in 2010, coupled with a large supply of new properties coming on stream, should reduce the rate of rental growth.

» Benign environment for refinancing. Ample liquidity in the market and strong backing from sponsors for most S-REITs will alleviate refinancing risk. We also expect low interest rates to continue this year, and such low rates make a rise in gearing more attractive. Since 2010, the rated S-REITs have taken proactive steps to manage interest obligations by availing themselves of the low interest-rate environment to refinance existing debt and extend debt maturities.

» Acquisitions will not over-extend S-REITs’ gearing. We expect S-REITs to use their well-capitalized balance sheets to continue acquisitive strategies and assume they will fund potential acquisitions with a mix of debt and equity while maintaining leverage within targeted limits of 40-45%.

» S-REITs well positioned within ratings. After a series of rating actions, detailed in Appendix I, S-REITs are well positioned within their respective rating categories. Over the past year, we have upgraded the corporate family rating of Ascendas REIT (A-REIT) to A3 from Baa1 and the corporate family rating of CapitaCommercial Trust (CCT) to Baa1 from Baa2.

We also upgraded the corporate family rating of Saizen REIT (Saizen) to B1 from Caa1 after the trust fully repaid its defaulted debt. Conversely, we downgraded the corporate family rating of Suntec REIT (Suntec) to Baa2 from Baa1 to account for its weakened financial profile after Suntec acquired a one-third stake in Marina Bay Financial Centre (MBFC), Phase 1.

» A macro disruption could shift our outlook to negative. External weakness, such as a crisis brought on by a sovereign-debt default or inflationary pressure in Asia would prompt Singapore to tighten its monetary policy further, thus reducing the scope for domestic demand to absorb new properties. A fall in occupancy or rental rates due to excess supply in the market or an adverse change in market conditions on the scale of the last financial crisis could trigger a change in the sector’s outlook to negative.

» S-REITs can cope with a rise in interest rates. A rise in interest rates would raise financing costs for S-REITs and make acquisitions more expensive. We expect S-REITs to manage such risk by (1) staggering debt maturities; (2) using proper hedging; and (3) relying on an appropriate mix of debt and equity to fund expansion.