Sunday, March 29, 2009

S-Reits face worst crisis

March 28, 2009

After astonishing growth, overall value of units plunges 60 per cent

By Jessica Cheam

SINGAPORE real estate investment trusts (Reits) are facing their worst crisis since they entered the market eight years ago and became wildly popular.

Property experts are confident Reits here, known collectively as S-Reits, will survive the global economic turmoil, but they warn some might fail along the way as the industry consolidates.

'S-Reits have been undergoing the most challenging and difficult times since their inception,' said property giant City Developments' group general manager, Mr Chia Ngiang Hong.

Reits are listed on the stock exchange. They own a property portfolio - shopping malls, for instance - and make regular payments to unit-holders.

Investors piled into Reits, attracted by the reliability of payments and the good yields. Reits grew at an astonishing rate - their combined market value hit $33.5billion in June 2007 from just $740million in 2003, Mr Chia noted.

However, the global crisis and tight credit markets have contributed to a market free-fall for Reits.

Overall, the value of Reit units has plunged by about 60per cent, said National University of Singapore (NUS) provost Tan Eng Chye.

Both Mr Chia and Professor Tan were speaking at the NUS Department of Real Estate's public forum on S-Reits yesterday.

Refinancing and recapitalisation risks are the darkest clouds hanging over the industry, said the real estate department's Associate Professor Sing Tien Foo.

An estimated $4.6billion in S-Reit debt is due to be refinanced this year. Another $12billion is due next year, he said.

The weak financial markets and elevated risks among lenders have made it difficult to get financing.

Given their structure, Reits are heavily dependent on capital markets, said Moody's senior analyst Kathleen Lee.

The industry will see a wave of consolidation, and smaller Reits are at greater risk of having refinancing issues.

Some here may even go under, she added, citing a case in Japan where New City Residence Reit sought court protection late last year with US$1.1billion (S$1.6billion) in debt.

Moody's, along with other rating agencies, has in recent months downgraded the credit ratings of many S-Reits.

One scenario that might emerge from this crisis could be firms with the 'smart money' acquiring weaker Reits and taking them private, said Mr Philip Levinson of the Asian Public Real Estate Association.

The association last month asked the Government to help Reits refinance an estimated $12 billion of debt.

It was reported that one request was to lower the minimum investor payout ratio that Reits must meet to qualify for tax transparency treatment - from the current 90per cent to as low as 50per cent.

This has since been rejected by the authorities, on the grounds that the characteristics of Reits as a stable, high-payout, pass-through vehicle are important considerations for investors.

At the panel discussion yesterday, rights issues also came under fire.

CapitaMall Trust had recently issued units at a hefty discount to market price, drawing criticism that this was an expensive source of capital to refinance debts.

Ms Lee said even though this is true, a rights issue is an available option to raise cash and will be the 'only way to go' for some as a matter of survival.

She added that besides refinancing risks, Reits are also rated on their portfolio diversity, quality of assets and track records of its management.

Guest speaker James Shilling, an established real estate academic from DePaul University in the United States, told the 150-strong forum audience that despite the current weak performance of Reits, he believed 'Reits are here to stay' and will experience growth in the long term.

In the meantime, Reits are in for a tough and volatile time ahead.

'When the volatility index comes down, investors will come back and that's when things will start turning a corner,' he said.

Ms Lee added that she believed the recovery will be a 'lazy L-shaped' one, where it will take some time before the market recovers fully.

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