REITs face refinancing risks from credit crunch

Investment trusts are losing their attraction as good defensive options for investors in the current turbulent markets.

As lending from banks begins to dry up, these trusts are facing refinancing difficulties. Analysts said their once attractive yields no longer seem as enticing, and real estate investment trusts (REITs) are no exception.

REITs that have the backing of sponsors such as Mapletree and City Developments are unlikely to face difficulties in refinancing loans. Market watchers said this is due to the strong financial support that such sponsors provide.

Brandon Lee, analyst, DMG & Partners Securities, said: “CapitaLand-backed ones like CapitaMall Trust, CapitaCommercial Trust, Frasers Centrepoint Trust should be able to easily refinance their loans.

“I think what should be of major concern right now should be the rates at which they can refinance. As you know, banks are unwilling to extend credit right now, so that drives the basis points for the cost of debt for most REITs.”

Observers said a solid track record and good reputation with banks will help trusts which are seeking to refinance their operations.

Erik Valen, head, Corporate Finance (Asia), Nordea Bank, said: “Banks nowadays look for long relationships with clients they know, with strong balance sheets. Coming from the outside, not having a track record is a difficult position.”

Analysts said the current 11 per cent average yield of REITs is unlikely to continue in the coming months as they use revenue to service higher interest rates.

Source : Channel NewsAsia – 16 Oct 2008

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