SINGAPORE - Risks for Singapore real estate investment trusts (Reits) will increase next year because weak economic fundamentals will weigh on demand while new supply is added into most sectors, Fitch Ratings said in a report released on Monday (Nov 23).
The credit rating agency said it expects Reits with stronger balance sheets to become more acquisitive in 2016 as they try to boost earnings growth by capitalising on lower asset valuations. Sector leverage - defined as debt over total assets - is likely to increase in 2016 as a result, it said.
"We expect hospitality REITs' earnings to continue declining, but at a slower pace in 2016 because we think visitor arrivals into Singapore will recover," said Fitch. "Nevertheless growth in hotel room supply in Singapore will continue to outpace demand, leaving operating conditions challenging for the sector."
Fitch forecast that ratings of CDL Hospitality Trust (BBB-/Stable) and Far East Hospitality Trust (FEHT, BBB-/Stable) will remain stable, supported by strong balance sheets, and around 40 to 50 per cent of income stemming from fixed rent.
But pressure on industrial Reits' earnings will increase in 2016 due to the weak global economic climate, said Fitch.
"We expect lower-specification industrial assets, such as warehouses and multi-user factories, to see weaker rental reversions than for higher-specification assets, such as business parks," said the agency. "The demand for business parks is stronger, and a significant part of the new supply is pre-leased."
The rating of Mapletree Industrial Trust (BBB+/Stable) is likely to remain stable, given that its assets are diverse and rentals are competitive, and because its financial profile is robust, said Fitch.
It said the strong performance of healthcare Reits is likely to continue in 2016, supported by robust demand for their services and an ageing population in Asia.
"Healthcare Reits' long-term lease structures with a high degree of rental protection and their high proportion of fixed-rate debt will also support earnings growth," said Fitch.
The rating of Parkway Life REIT (BBB/Stable) is likely to remain stable, supported by its robust asset-quality, sound lease structures, and its healthy financial profile, the agency said.