atans1

Reits are not bonds/ S-Reits

In Economy, Financial competency, Property, Reits on 24/11/2015 at 1:25 pm

“Real estate is TIPS (Treasury Inflation Protected Securities) on steroids,” adds Mr Steers. “Reits are not bonds. The most certain thing is that if rates are rising and you are in fixed income you will lose money.” FT 

Mr Steers is  from real estate investment firm Cohen & Steers in New York and he’s bullish on US real estate.

Meanwhile in S’pore, CNA reported on 18 November

‘GOOD DEMAND’ FOR SINGAPORE-LISTED REITS

“With the lower leverage threshold, there might be more Singapore REITs who will look to tap this source of funding, given it is still treated as equity instead of debt,” said Mr Tim Gibson, co-head of global property equities at Henderson Global Investors in Singapore. His firm manages about US$123 billion (S$175 billion) worldwide. “Investors continue to seek yield in this environment,” he added.

Mr Neel Gopalakrishnan, an emerging-markets fixed income analyst at Credit Suisse’s private banking and wealth management unit in Singapore, said: “Most Singapore-listed REITs have good credit quality. Hence, there is likely to be good demand (for their perpetuals*).”

Singapore’s listed REITs had an average debt-to-asset ratio of 34.6 per cent at the end of September, versus 32.8 per cent from a year earlier, according to data compiled by Bloomberg.

The new cap on borrowings takes effect from Jan 1 and the REITs could issue as much as S$12.5 billion of traditional debt without breaching the new threshold, said Mr Hasira De Silva, a Singapore-based analyst at Fitch Ratings.

That leeway narrows to S$7.5 billion if their S$110 billion of assets suffer a 10 per cent depreciation, he said.

http://www.channelnewsasia.com/news/singapore/perpetual-debt-the-new/2270948.html?cx_tag=undefined&cid=tg:recos:undefined:standard#cxrecs_s

CNA also reports:

Falling values, rents and occupancies for debt-backed properties could tip Singapore’s economy into further trouble amid the slowest growth in three years.

Office rents may fall as much as 7 per cent this year and another 8 per cent next year as demand slows, according to property consultancy DTZ, while home prices keep declining as a result of cooling measures and loan curbs.

On Oct 26, office landlord Keppel REIT sold S$150 million of perpetual debt without a so-called step-up coupon, a gradually rising interest rate that is usually a feature of such bonds. It sold the notes at 4.98 per cent, 183 basis points more than seven-year debt it sold in February.

In the same month, business park owner Ascendas REIT raised S$300 million issuing similar notes, while serviced apartments specialist Ascott Residence Trust issued S$250 million of them in June.

The value of Singapore’s office buildings fell 0.1 per cent in the quarter ending Sept 30 from the previous three months, while shop prices declined 0.3 per cent, according to data from the Urban Redevelopment Authority.

Home prices dropped 1.3 per cent, the most since the second quarter of 2009, according to data compiled by Bloomberg.

The FTSE Straits Times Real Estate Investment Trust Index has dropped 11.4 per cent this year, on course for its worst annual performance since 2011.

Meanwhile risks for Reits here will increase in 2016 because weak economic fundamentals will weigh on demand while new supply is added into most sectors, Fitch Ratings said in a report released on 23 Nov.

Fitch expects S-Reits with stronger balance sheets to become more acquisitive in 2016 as they try to boost earnings growth by capitalising on lower asset valuations. Sector leverage – as measured by debt to total assets – is likely to increase in 2016.

On hotel ones, earnings will likely continue declining next year, but at a slower pace, as visitor arrivals into Singapore is expected to recover. Nevertheless growth in hotel room supply in Singapore will continue to outpace demand, leaving operating conditions challenging for the sector.

“We expect ratings of CDL Hospitality Trust (BBB-) and Far East Hospitality Trust (FEHT, BBB-) to remain stable, supported by strong balance sheets, and around 40-50 per cent of income stemming from fixed rent.”

Other hospitality Reits considered in the report include Ascendas Hospitality Trust and OUE Hospitality Trust.

On industrial Reits, pressure on earnings will increase in 2016: the world economy is weak”We expect lower-specification industrial assets, such as warehouses and multi-user factories, to see weaker rental reversions than for higher-specification assets, such as business parks. The demand for business parks is stronger, and a significant part of the new supply is pre-leased,” it said. Ascendas REIT, Mapletree Industrial Trust and VIVA Industrial Trust are among the industrial REITs covered

The strong performance of healthcare Reits is likely to continue in 2016, supported by robust demand for medical services and an ageing population in Asia. 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.

—–

*Landlords in Singapore are planning to issue perprtual bonds which are treated as equity to get around new rules curbing their debt amid a property slump. Data from Fitch Ratings showing Reits having issued a record S$700 million of perpetual notes with no set maturity date thus far this year.

The Monetary Authority of Singapore is capping borrowings of Reits at 45% of assets from next year, and debt that can be considered equity (Perpetuals) offers landlords a way out.

Under global accounting rules, bonds with no fixed maturity that allow the deferral of coupon payments can be treated as equity.

 

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  1. The CNA article read as if it is an article about bonds rather than equity and you rightly point out that REITs are not bonds but will be affected by rising interest rates nonetheless. The huge difference is the rise in interest rates will find strong demand for bonds in the US, at least for the investment grade sort because rising interest rates reduces corporate pension fund liabilities. Not quite the same thing for REITs even if they are often seen as interest rate plays.

    The article points out that CDL Hospitality Trust and Far East Hospitality Trust are rated BBB- but this rating pertains to senior unsubordinated debt. The article ignorantly pointed out that Keppel Reit’s perpetual notes yielded 183 bp over their old 7 year note without understanding debt subordination in the capital structure. The perp’s equity-like feature is due to subordination and as such they are rated at least 2 notches below the senior unsubordinated rating. Those who bought perps thinking they are investment grade are in for a surprise.

    Investors cannot simply think of bonds as if they are common equity. There are different type of bonds with different level of risks.

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