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REAL estate investment trusts in Singapore or S-Reits will be underpinned by the cashflow resilience of their underlying properties, strong management of operations and capital, and the strength of their sponsors or key shareholders, Standard and Poor’s (S&P) said in a report published yesterday.

Still, in light of the currently sluggish economic climate, S-Reits will have much to contend with as leverage and refinancing risks increase while rents, occupancy rates, cashflows and capital values are on the decline, said S&P credit analyst Allan Redimerio.

‘Most S-Reits have high levels of encumbered assets on their balance sheets – meaning they have little to pledge to banks if conditions worsen.’

‘Given the strong emphasis currently on refinancing risk, we expect S-Reits to continue to assess their options on reducing their financial leverage, as well as increasing the number of unencumbered properties on their balance sheet to provide them with greater financial flexibility,’ said Mr Redimerio.

According to S&P, CDL Hospitality Trust, Parkway Life Reit, Frasers Commercial Trust, First Reit and MacarthurCook Industrial Reit appear to be among the most vulnerable, while CapitaMall Trust, Ascendas Reit, Frasers Centrepoint Trust and CapitaCommercial Trust are expected to be the most resilient against real estate and external shocks.

S&P noted that the government’s decision to increase its share of default risk on certain bank loans to small and medium-sized enterprises will contribute to the recovery of the S-Reits.

Industry watchers have said that more than $4 billion in S-Reit debt is estimated to be due this year for refinancing and a further $2 billion estimated to be due next year.

However, the easing of credit conditions has allowed vital bank funding to flow more easily, aiding the Reits. In an earlier report, UOB Kay Hian cited lower refinancing risks as the reason for its bullish take on the sector.

Source : Business Times – 4 Jul 2009