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Fitch Ratings expects Singapore real estate investment trusts (SREITs) to face greater risks next year as weak economic fundamentals weigh on demand while new supply is added into most sectors.
In 2016, SREITs with robust balance sheets are expected to become more acquisitive as they try to boost earnings growth by capitalising on lower asset valuations, it said. Sector leverage – which is defined as debt to total assets – will likely increase next year.
The agency expects the earnings of hospitality SREITs to continue to decline albeit at a slower rate as visitor arrivals to Singapore is expected to recover. Nevertheless, Singapore will see growth in hotel room supply continue to outpace demand, leaving operating conditions challenging for the sector.
With this, Fitch expects ratings of “CDL Hospitality Trust (BBB-/Stable) and Far East Hospitality Trust (FEHT, BBB-/Stable) to remain stable, supported by strong balance sheets, and around 40 percent to 50 percent of income stemming from fixed rent.”
Meanwhile, industrial SREITs will see increased pressure on earnings in 2016 due to weak global economic climate.
Fitch said lower-specification industrial assets is expected, like multi-user factories and warehouses, to witness weaker rental reversions compared to higher-specification assets, like business parks.
Notably, demand for business parks is stronger, with a significant part of the new supply pre-leased.
As such, it expects the rating of Mapletree Industrial Trust (BBB+/Stable) to “remain stable, given that its assets are diverse and rentals are competitive, and because its financial profile is robust.”
Moreover, Fitch anticipates the strong performance of healthcare SREITs to continue in 2016, supported by robust demand for their services as well as Asia’s ageing population.
“Healthcare SREITs’ long-term lease structures with a high degree of rental protection and their high proportion of fixed-rate debt will also support earnings growth,” it said.
“The rating of Parkway Life REIT (BBB/Stable) is likely to remain stable, supported by its robust asset-quality, sound lease structures, and its healthy financial profile,” it added.
Nikki De Guzman, Editor at CommercialGuru, edited this story. To contact her about this or other stories email nikki@propertyguru.com.sg
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