Asian Reits survive H1, but challenges remain: CBRE

Acquisition, IPO activities unlikely to recover to pre-slump levels in near future

(SINGAPORE) Most Asian real estate investment trusts (Reits) have survived the economic storm in the first half of the year, but challenges - from reducing gearing to growing distributions - still lie ahead, says CB Richard Ellis (CBRE).

The market capitalisation of Asian Reits rose 14.3 per cent in H1 2009, according to the property consultancy in a report yesterday.

In Singapore, the FTSE Reit Index has jumped more than 35 per cent from January, gaining 7.34 points yesterday to close at 503.39. 'General improvement in the credit market, government support for the re- financing of J-Reits (Japan Reits) and successful rights issues for S-Reits (Singapore Reits) have substantially enhanced Reits around the region,' says CBRE Research Asia executive director Andrew Ness.

Many large-cap Asian Reits managed to grow their rental income recently, CBRE notes. In Singapore, several S-Reits have also met or exceeded analysts' expectations with their latest financial results.

While the Asian Reit market could improve further in the second half of the year, acquisition and initial public offering activities are unlikely to recover to pre-downturn levels in the coming months, CBRE says.

In H1 2009, Japan Prime Realty Investment's US$325 million purchase of a Tokyo office building was the largest deal recorded among Asian Reits. The value of the 10 largest transactions involving Asian Reits was just 63 per cent of that in H2 2008, CBRE says.

'Reducing financial leverage will continue to be the major task for many Asian Reits, especially for those with assets which have experienced a deep price correction that may lead to potential breach in loan-to-value ratio covenants,' says Mr Ness.

Some market watchers share similar concerns about property values and their impact on gearing. In an Aug 12 report, CIMB analyst Janice Ding notes that S-Reits may conduct another round of equity fund-raising to boost their balance sheets, preparing for 'for a sharp devaluation of asset values at year-end and uncertainties in capital markets.'

CBRE also expects Asian Reits to face challenges in growing distributions when rents are falling. It notes for instance, that over 75 per cent of J-Reits expect to see distribution dividends fall in the approaching reporting period.

Office Reits in Singapore also have something to worry about - according to a DBS Vickers report on Tuesday, they could experience negative rental reversions from 2010 onwards, because of weak supply and demand fundamentals.

The research house estimates that S-Reits will have some $1.89 billion of debt maturing next year, and $3.28 billion coming due in 2011.

Source: Business Times, 27 Aug 2009