Analyst warns S-REITs on threats from additional debt

Moody's Investors Service says that numerous Singapore Real Estate Investment Trusts (S-REITs) have pursued greenfield developments this year.

As outlined in the recently released Special Comment on S-REITs, Ascendas REIT (A3 stable), CapitaCommercial Trust (Baa1 Stable), CapitaMall Trust (A2 stable), K-REIT Asia (Baa3 stable), and AIMS AMP Capital Industrial REIT (Ba2 stable) have all announced new developments.

High valuations driven by increased competition for properties have posed challenges for S-REITs trying to acquire yield-accretive assets in Singapore.

"Low interest rates and more buyers competing for the same buildings have raised prices for already-developed properties, thus making development projects increasingly attractive for S-REITs," says Alvin Tan, author of the Special Comment and an Analyst at Moody's.

However, such projects raise risks in property development and put pressure on key credit metrics during their construction because S-REITs take on additional debt before the properties are able to generate income from tenants. They are therefore generally viewed negatively by Moody's.

"Nonetheless, our existing ratings for S-REITs already factor in a cushion for such developments, such as those announced so far this year," says Tan.

Trusts have also taken several steps involving their sponsors or contractual obligations with builders and managing agents to minimize exposure to property development risks.

Additionally, regulatory restrictions limit S-REITs development activities.

"The Monetary Authority of Singapore's cap on development activities at 10% of the total value of property owned by S-REITs keeps S-REITs within our investment-grade criteria for this rating factor according to our rating methodology for REITs and other commercial property firms," says Tan.