S-REITs weighed down by modest economic recovery and property supply

Ratings agency Moody’s on Thursday said Singapore real estate investment trusts (S-REITs) could suffer from the supply of new commercial properties and modest economic growth.

In its latest report, Moody’s said that despite the resilience of most S-REITs in the last six months, it expects the fundamental prospects for the sector to remain challenging in the next 12 months.

This is because of the substantial supply of commercial properties due to come on stream over the next two years.

The report notes that Singapore’s economic recovery for the next 12 months will be about 5 per cent, which is below the average GDP growth of 8 per cent from 2004-2007.

And Moody’s said this will not be enough to absorb the increasing supply of commercial properties that was planned before 2008, when Singapore’s economic growth rate was much higher.

As such, the strong supply in the 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.

Moody’s also said that while suburban malls will remain resilient, downtown shopping malls will face near-term pressure on rental rates.

But on the positive side, Moody’s said that S-REITs should see relatively stable operating incomes, high-quality assets and low development risk.

It also notes that many investment-grade S-REITs have proactively dealt with refinancing risk issues by raising new loans or equity, totalling US$4 billion last year.

It said that those S-REITs with strong sponsors are in a better position to cope with refinancing as they have easier access to equity markets.

But the report also notes that the credit profiles for smaller-rated S-REITs without strong sponsors have been weakened by the challenges of obtaining new funds from banks.

Source : Channel NewsAsia – 18 Mar 2010

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