Thursday, February 5, 2009

Property sector needs govt help in refinancing $12b of debt

THE Government has been asked to help listed property firms here, especially real estate investment trusts (Reits), to refinance an estimated $12 billion in debt, given the frozen state of credit markets.

The appeal comes from the Singapore-based Asian Public Real Estate Association (Aprea), a body set up to represent the listed real estate sector in Asia.

‘Government assistance is needed to get liquidity moving and reduce the risk of plummeting real estate values and pressure on the capital positions of lenders,’ said a background paper by Aprea. ‘Its help is needed to restart the credit markets for commercial real estate debt.’

‘This is an issue for the general commercial real estate market and, by extension, the broader real estate market and the broader economy,’ said its chief executive Peter Mitchell yesterday.

Aprea has been submitting a series of proposals since last November to regulators in Singapore and Japan, seeking assistance in these unusual times, he said.

One assistance option would be a lending facility being implemented in Australia, said Aprea. The country announced a A$4 billion (S$3.86 billion) fund with four Australian banks to support lending in the commercial property sector.

The Singapore Government has unveiled measures to free credit to businesses here but nothing specifically aimed at listed real estate entities.

Inability to raise credit and refinance could lead to foreclosures, bankruptcies and forced sales, leading to market instability and a potential downward spiral, the paper said. ‘The more that real estate loans can’t get refinanced, the more risk there will be of losses for the banks, some of which can ill afford more losses.

‘Banks’ jobs are to make loans, not own real estate. There is a risk that banks will not be able to absorb, manage and turn around properties at this scale if they come back to the lenders,’ it said.

‘The collapse of an otherwise healthy real estate market caused by general credit paralysis has the potential to significantly aggravate recessionary pressures.’

There is a risk of default being forced upon property owners that hold property with good cashflows, a risk that would not exist in a normally functioning credit market, it said.

The current negligible activity in commercial real estate market is a particular issue for Reits, which the paper described as a ‘handle with care’ product.

Ratings agencies are talking about downgrading Singapore Reits because of refinancing concerns. But it is because of the dysfunctional credit environment and should not happen, said Mr Mitchell.

‘It is not the Reits themselves having problems. They are just being impacted by the freezing of credit.’

Of the estimated $12 billion of refinancing needs this year, one-third is attributed to Reits. It is important to help Reits through the turmoil as they are what will attract investors as Singapore moves out of this downturn, he said.

‘Investors are going to be risk-averse and will look for things that are liquid, transparent and lowly geared, equity-orientedinvestment. That’s what Reits are.’

Source: Straits Times - 5 Feb 2009

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