Reits still a good bet but issues remain

REAL estate investment trusts (Reits) are still a good bet for the most part, but issues remain that must be cleared up, said panellists at a roundtable yesterday.

For one, a reform in the debt maturity profile for Reits is needed, said JPMorgan analyst Christopher Gee. The roundtable on Reits and the future of real estate finance in Asia was organised by Singapore Management University’s (SMU) Centre for Asset Securitisation in Asia.

Some Asian Reits pursued an aggressive acquisition strategy during the boom period of 2006-2007 as the low cost of financing tempted them to buy quality assets despite compressed entry yields, said Mr Gee.

This pushed Reits (including many in Singapore) to borrow and increase their gearings to high levels in order to make their acquisitions. They could have been ‘gearing up’ with the intention of raising equity later, he said.

However, the current financial crisis has affected many plans.

By and large, all of the debt used by the Reits is in the form of bullet repayment loans (where the payment for the entire loan and sometimes the interest as well is due only at the end of the loan term) or bonds, which can be ‘lethal’ if debt rollover coincides with financial market stress, said Mr Gee.

JPMorgan’s estimates show that for Singapore-listed Reits, 37 per cent and 41 per cent of total debt outstanding will be maturing in 2011 and 2012 respectively.

‘What if the current recovery is a W-shaped recovery and debt capital markets come under stress at that point in time?’ Mr Gee asked.

Instead, he said, Reits should consider a ‘through-the-cycle’ (TTC) investment hurdle to justify an acquisition.

For one S-Reit, for example, a TTC analysis of the weighted-average cost of capital would have highlighted the end of value accretive acquisitions after early 2007.

The Reit should have then lowered its gearing levels at that point in time by taking advantage of cheap equity cost, Mr Gee said. Instead, the Reit (Mapletree Logistics Trust) continued making acquisitions well into 2008.

Another concern that was raised was that in a downturn, good asset managers are essential for a Reit to do well. However, most Reit managers today started managing their trusts at a time when the asset market was booming. So they are still untested, the panellists said.

But Reits are still considered attractive investments as they are transparent and pay out the bulk of their income as dividends to unitholders, said Michael Smith, head of Asia real estate investment banking at Goldman Sachs.

Source: Business Times, 24 Nov 2009