S-REITs face challenges despite resilience

Modest recovery in the economy and the strong supply of new properties are weighing on Singapore real estate investment trusts, says Moody's.

Peter Choy, a Moody's VP/Senior Credit Officer, said, "Despite the operational resilience of most S-REITs in the last six months, we expect the fundamental prospects for the sector to remain challenging in the next 12 months based on the substantial supply of commercial properties due to come on stream over the next two years."

The special report entitled "Modest Rebound and Strong Supply Weigh on S-REITs" notes that Singapore's economic recovery for the next 12 months, which is forecast to be approximately 5%, "will be inadequate to absorb the increasing supply of commercial properties that was planned before 2008 when Singapore's economic growth rate was much higher."

Choy, author of the report, added, "The strong supply in Singapore's commercial property sector in the next 12-18 months will continue to impact rental and vacancy rates, in particular the office and the industrial sectors. While suburban malls will remain resilient, downtown shopping malls will face near-term pressure on rental rates."

The report notes as well that Investment-grade S-REITs raised new loans or equity, totaling US$4 billion in 2009, to deal with material refinancing risk issues. In this regard, "S-REITs with strong sponsors are in a better position to cope with refinancing as they have easier access to equity markets for augmenting liquidity and reducing leverage." The same can't be said about smaller-rated S-REITs without strong sponsors amidst banks' cautious attitude towards property lending.