Moody’s cautious of Singapore REITS venture into China due to business risks

KUALA LUMPUR: Moody's Investors Service is cautious about Singaporean industrial real-estate investment trusts’ (S-REITs) plans to expand into China due to a number of business risks, particularly because of the legal and regulatory environment.

It said on Thursday, March 24 the competition for industrial properties in Singapore is intensifying, and the S-REITs' growing risk appetite and the low interest rate environment have only exacerbated the competitive pressure.

In addition, a large supply of new industrial properties opening up over the next two years may limit rental growth in the medium term.

Moody’s associate analyst Alvin Tan said in their search for higher yields, the industrial S-REITs are now looking at expanding into new regions, with several of the S-REITs identifying China, the world's fifth most active real-estate investment market, as a possibility.

"But moving into China would have negative credit implications, given the uncertainties associated with entering an unfamiliar market and the associated regulatory risk, which could nullify the potential gains of geographical diversification," said Tan.

He cited China’s financial, tax, and legal frameworks were still in their infancy, which could have a number of negative ramifications, such as the regulatory risk related to tax policies on profits, the enforcement of lease contracts, and land ownership issues, as well as foreign-exchange risk for the repatriation of capital.

"Still, we do so see positive factors that could mitigate, but not fully offset, the impact of these negatives," Tan said.

The S-REITs' plan to diversify overseas would reduce their exposure to the island nation. As for those with sponsors which had an established presence abroad, the former could tap into the latter’s China-related experience.

The experience in the China market would help the S-REITs reduce the risks associated with operations in a complex regulatory environment.

Finally, the acquisition of overseas properties with long-term leases and rental guarantees would provide additional income and stability to medium-term operating results.

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