Moody's maintains stable outlook for S-REITs while growth continues

KUALA LUMPUR: Moody's Investors Service has maintained its stable outlook on Singapore Real Estate Investment Trusts (S-REIT) over the next 12-18 months.

However, new supply, rising interest rates, and growth initiatives could challenge the sector, it said.

In a statement Monday, June 20, Moody’s analyst Alvn Tan said the rating agency’s rated S-REITs were well-positioned within their respective rating categories, as reflected in the stable outlooks for most of the rated S-REITs.

Moody’s maintained its outlook on the S-REITs in its entitled "Stable S-REIT Sector Amid Strong Economy and Healthy Balance Sheets."

According to the report, Moody's sees continued growth in Singapore's economy over the next 12-18 months that would lead to increased rental rates and high occupancies.

Nonetheless, a slowing of Singapore GDP growth, coupled with the large supply of new PROPERTIES [] coming on stream, should reduce the rate of rental growth, it said.

The environment for refinancing is currently benign as ample liquidity in the market and strong backing from sponsors for most S-REITs will alleviate refinancing risk, it said.

Moody’s said that while S-REITs continued to use their well-capitalised balance sheets to fund their acquisitive growth strategies in 2011, they were unlikely to over-extend their gearing and should maintain their leverage within targeted limits of 40-45%.

Any rise in interest rates will raise financing costs for S-REITs and make acquisitions more expensive, it said.

"We expect S-REITs to manage such risks by (1) staggering debt maturities, (2) using proper hedging, and (3) relying on an appropriate mix of debt and equity to fund purchases," said Tan.

External weaknesses, such as a crisis brought on by a sovereign debt default or inflationary pressure on Asia, could prompt Singapore to tighten its monetary policy further, thus reducing the scope for domestic demand to absorb new properties, he said.

A fall in occupancy or rental rates due to excess supply in the market or an adverse change in market conditions could trigger a change in the sector outlook to negative, he said.