Moody's: Modest economic rally, strong supply weigh on Singapore REITs

HONG KONG: Moody's Investors Service says Singapore real estate investment trusts (S-REITs) are being weighed down by the modest recovery in the Singaporean economy and by the  strong supply of new properties coming on the market.

"Despite the operational resilience of most S-REITs in the last six months, we expect the fundamental prospects for the sector to remain challenging in the next 12 months based on the substantial supply of commercial properties due to come on stream over the next two years," said Peter Choy, a Moody's VP/Senior Credit Officer and author of the report issued on Thursday, March 18.

The report notes that Singapore's economic recovery for the next 12 months will be about 5% - based on Moody's sovereign unit forecast - which is below average GDP growth of 8% from 2004-2007. This will be inadequate to absorb the increasing supply of commercial properties that was planned before 2008 when Singapore's economic growth rate was much higher.

"The strong supply in Singapore's commercial property sector in the next 12-18 months will continue to impact rental and vacancy rates, in particular the office and the industrial sectors. While suburban malls will remain resilient, downtown shopping malls will face near-term pressure on rental rates," says Choy.

More positively for the sector, the preponderance of investment-grade ratings among rated S-REITs reflects issuers' relatively stable operating incomes, high-quality assets, and low development risk, says the report.

In addition, the report notes that many Investment-grade S-REITs have proactively dealt with material refinancing risk issues by raising new loans or equity, totaling USD4bn in 2009. Those S-REITs with strong sponsors are in a better position to cope with refinancing as they have easier access to equity markets for augmenting liquidity and reducing leverage.

However, credit profiles for those smaller rated S-REITs without strong sponsors have been weakened by the challenges of obtaining new funds from banks which have taken a cautious attitude towards property lending.