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Update: Industrial S-Reits to be acquisitive in 2016: Moody's
SINGAPORE industrial real estate investment trusts (Reits) will continue to look overseas for acquisitions in 2016 as they pursue asset growth and yield accretion, away from challenging domestic business conditions, Moody's said in a Wednesday report.
So far, they seem to have gravitated towards Australia and will continue to do so given the stable and well-regulated real estate market Down Under, it said. Industrial supply in Australia will also be underpinned by continued demand for logistic and distribution-centre space in 2016.
Moreover, the lease terms in Australia are typically more attractive than those of Singapore assets. Typical rental structures include annual rental escalations of 3-4 per cent, versus Singapore's 1-2 per cent. They also have longer lease tenures of five to seven years and are on freehold land, versus Singapore's one to three years on leasehold land.
Moody's expects industrial Reits to exercise discipline in financing acquisitions with a prudent mix of debt and equity to maintain their credit profiles.
"Debt-funded acquisitions are credit negative as the increase in borrowings weakens leverage ratios. High leverage drains cash resources for interest payments and particularly heightens vulnerability to operating and market challenges," it said.
Three of four rated industrial S-Reits have announced material overseas acquisitions over the past 12 months: Ascendas Reit (A-Reit), Mapletree Logistics Trust and Cache Logistics Trust.
"We view the trend towards lower asset concentration as positive since most industrial Reits have maintained a largely Singapore-focused investment portfolio since inception."
Following these acquisitions, A-Reit's asset concentration in Singapore will fall to around 86 per cent, assuming the acquisition of its 27th asset in Australia is successfully completed, down from over 95 per cent at Dec 31, 2014.
Similarly, Cache's Singapore assets will account for 88 per cent of its total investment portfolio, compared with 98.5 per cent before it bought six Australian properties in 2015.
A-Reit and Cache both completed credit-positive equity issuances in late 2015, with part of the proceeds used for debt repayment, thereby reducing leverage following a number of debt-funded acquisitions.
In A-Reit's case, as a result of its largely debt-funded A$1.1 billion (S$1.1 billion) acquisition of 26 logistics assets in Q4 2015, its debt leverage weakened to over 42 per cent, from 36.4 per cent at end-September.
But in line with the management's plan to deleverage before March 31, 2016, A-Reit then completed a recapitalisation exercise in late 2015, and used some of the proceeds to repay debt, bringing leverage back below its tolerance level of 40 per cent.