Singapore reits to face headwinds over next 18 months: Moody's

Occupancy and rental rates for all property segments, apart from healthcare, should come under pressure, because of abundant supply and soft demand, against the backdrop of slowing economic growth in Singapore.
Occupancy and rental rates for all property segments, apart from healthcare, should come under pressure, because of abundant supply and soft demand, against the backdrop of slowing economic growth in Singapore. ST PHOTO: JAMIE KOH

SINGAPORE - Credit quality of Singapore Reits will come under pressure over the next 12 to 18 months as their leverage weakens on the back of debt-funded investments, ratings agency Moody's said on Thursday.

Tough operating environment through 2017 will mean the Moody's-rated S-Reits will face headwinds, the agency said in a report.

Occupancy and rental rates for all property segments, apart from healthcare, should come under pressure, because of abundant supply and soft demand, against the backdrop of slowing economic growth in Singapore.

Moody's expects most stress in the office and industrial property segments, where higher supply additions of offices and warehouses will continue to outstrip tepid demand growth and weigh on occupancy.

"We believe S-Reits will maintain an appetite for growth in Singapore and overseas, as they pursue yield-accretive acquisitions," said Ms Rachel Chua, a Moody's analyst and the report's co-author.

However, "Assuming further debt-funded acquisitions, the S-Reits' leverage will weaken from already-high levels on Sept 30, signaling their weakening capacity to weather potential asset value declines," said Ms Jacintha Poh, a Moody's Vice President and Senior Analyst, and co-author of the report.

S-Reits are exposed to refinancing risk, high dividend payouts and funding mismatches arising from using relatively short-term debt to fund long-term assets, the report said. Nonetheless, the industry's debt-maturity profile has improved since the global financial crisis in 2008-2009.

Overall, Moody's says that in an event of stress, S-Reits that have long-standing relationships with domestic banks and those with strong sponsors will likely continue to be supported by domestic banks.

As for the S-Reits' interest cover positions, Moody's says that the trusts are insulated from rising interest rates over the next 12-18 months, because more than half of their outstanding debt is tied to fixed interest rates and refinancing requirements are moderate.