Singapore industrial real-estate investment trusts' expansion into China poses risk:Moody's

The competition for industrial properties in Singapore is intensifying, said Moody's.

The S-REITs' growing risk appetite and low interest rate environment have only exacerbated the competitive pressure.

The expansion poses a number of business risks, particularly because of the legal and regulatory environment.

In addition, a large supply of new industrial properties opening up over the next two years may limit rental growth in the medium term.

"In their search for higher yields, the industrial S-REITs are now looking at expanding into new regions," says Alvin Tan, a Moody's Associate Analyst and author of the report, "with several of the S-REITs identifying China, the world's fifth most active real-estate investment market, as a possibility."

"But moving into China would have negative credit implications, given the uncertainties associated with entering an unfamiliar market and the associated regulatory risk, which could nullify the potential gains of geographical diversification," adds Tan.

In the case of China, the country's financial, tax, and legal frameworks are still in their infancy, which could have a number of negative ramifications, such as the regulatory risk related to tax policies on profits, the enforcement of lease contracts, and land ownership issues, as well as foreign-exchange risk for the repatriation of capital.

"Still, we do so see positive factors that could mitigate, but not fully offset, the impact of these negatives," says Tan.

Overseas diversification would lessen the S-REITs' geographic exposure to Singapore. And those with sponsors that have already established a presence abroad could tap into their sponsors' China-related experience to reduce the risk associated with operations in a complex regulatory environment. Finally, the acquisition of overseas properties with long-term leases and rental guarantees would provide additional income and stability to medium-term operating results.