Moody's raises Singapore REITs outlook to stable

Strong economic rebound, rent stabilisation, steady performance and lower refinancing risk elevated rating from negative.

Moody's Investors Service has revised its outlook for Singapore's real-estate investment trusts (S-REITs) to stable from negative, reflecting its view that the sector's fundamental credit conditions will neither erode nor improve materially over the next 12 to 18 months, according to a Moody's report.

"The stable outlook is supported by three primary factors: 1) the strong rebound in Singapore's economy; 2) the stabilisation of rents across the retail, office, and industrial property sub-sectors; and 3) the steady performance and lower refinancing risk of the rated S-REITs," says Peter Choy, a Moody's Vice President and Senior Credit Officer.

Singapore's economy has rebounded strongly, registering growth of 13% year over year in the first quarter of 2010, driven substantially by export growth -- particularly, to improved demand from the electronics and pharmaceuticals industries.

"For the full year 2010, Moody's sovereign unit projects growth in Singapore's GDP of 6.7%, a return close to the 8% average annual rate that had prevailed from 2004 through 2007," says Choy.

Robust economic growth in Singapore and its neighboring Asian countries has helped reverse previously weak demand for office space.

"Likewise, the opening of Singapore's two integrated gaming resorts and the corresponding increase in tourist arrivals have spurred an increase in retail sales, which in turn supports demand for retail space," adds Choy.

"Although developers are launching a strong supply of office, retail, and industrial properties in Singapore during the rest of 2010 and into 2011, the downward adjustment in rents of the last 12 months has already – and substantially -- reflected the coming increase in inventory," comments Choy.

"We therefore expect a slowing in the decline in rents for these sectors."

The decline in rents that began in late 2008 has tapered off. At the end of 1Q, prime office rents were down 0.7% from the previous quarter, while Grade A office space had registered a slight increase of 1.25%.

Prime retail rents remained fairly stable in 1Q, although Prime Orchard Road rents were down 0.7%, from the previous quarter. Hi-tech industrial properties suffered a decline in rents, while rents for factory units held.

In addition, industrial REITs proved rather resilient throughout the global financial crisis (from the fourth quarter of 2008 through 2009), and the recovery in Singapore's manufacturing sector will further reinforce the stability of industrial properties.

Most S-REITs also saw some improvement in their 1Q revenue year over year. Since the 2H 2009, they have taken actions to improve their capital structure. In addition, the decline in acquisitions has also alleviated the need for short-term bridge loans.

As a result, the amount of debt maturing in 2010 is quite low. Those S-REITs with a higher amount of debt falling due in 2011 have already proven their ability to refinance their debt during challenging conditions, as they did in 2009.