S & P sounds alarm bells on Singapore REITs’ $4b dollar acquisition spree

Standard & Poor's Ratings Services addresses the most frequently asked questions about the increase in buyouts by Singapore's real estate investment trusts in a report released today, titled "What Are The Credit Implications Of The Surge In Acquisitions By Singapore REITs?"

After recapitalizing and improving their financial positions for the past three years, S-REITs are now expanding their asset portfolios. In the first quarter of 2011, we estimate that US$4 billion of commercial property transactions were closed, significantly higher than in the fourth quarter of 2010. It is also higher than that in the first quarter of 2010. We expect more acquisitions in the second half of 2011 as S-REITs strive to increase scale and diversify cash flows.

"So far, the impact of the acquisitions on S-REITs that Standard & Poor’s rates has been credit neutral. This is because these investment grade S-REITs already have strong financial positions and are able to absorb and integrate the acquisitions without any negative effects on credit quality," said Standard & Poor's credit analyst Wee Khim Loy.

Nevertheless, we believe there are risks for investors, particularly if this wave of acquisitions signals a change in some S-REITs’ historically prudent approach to financial risk management or indicates a significant increase in their risk tolerance.

The article attributed the recent surge in acquisitions by S-REITs to their strengthened balance sheets, desire for stable cash flows, an improved operating environment and low interest rates.

"We believe S-REITs will be active in acquisitions over the next 12 months. Though interest rates are rising in Singapore, they are still attractive for S-REITs, and the funding environment is reasonably favorable, although lenders' confidence could change quickly given the evolving uncertainties in the economies and financial markets in Europe and the U.S," said Ms. Loy.