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QE's end expected to have minimal impact on S-Reits
THE United States Federal Reserve's third round of quantitative easing (QE)3 which recently ended will tighten monetary liquidity and likely result in higher interest rates.
But that may not necessarily spell doom and gloom for Singapore's real estate investment trusts (Reits) sector, whose profits are derived in part from interest rate spreads.
The Business Times' recent interview with CEOs of S-Reits that topped SIAS Corporate Governance Awards (SCGA) 2014 revealed management's confidence in their trusts' stable credit ratings and healthy gearing ratio to offset the impact of rising interest rates in the near term, but also divulged some of the foreseeable headwinds underway.
In fact, Frasers Commercial Trust's (FCOT) CEO Low Chee Wah expects his trust to benefit from QE's end.
According to Mr Low, the Fed is expected to increase interest rates when the economy is on a stronger footing, and a stronger economy will result in higher demand for office space.
"It may (also) result in the tightening of liquidity, and this may prevent the formation or the worsening of asset bubbles," he said.
With a limited supply of office space in Singapore over the next year, coupled with an expected increase in demand, in Mr Low's view, FCOT - with a gearing ratio of 37.1 per cent as at Sept 30, 2014, and a portfolio of four commercial office assets and one business space asset in Singapore and Australia - is well-positioned to benefit from QE's end.
Instead, what is of concern to Mr Low is the office market's cyclical nature, as well as its exposure to the up and down trends of the economy.
While the global economy is expected to grow, the pace of growth may be slower and dependent on the large economies of the US and China, he said. As such, unexpected headwinds in the global economy may affect the office sector.
Thus, having a balanced portfolio is beneficial for FCOT, as both the Singapore and Australian economies have different economic cycles, according to Mr Low.
With a gearing ratio of 34.1 per cent, almost half the current leverage ratio mandate of 60 per cent for credit-rated trusts, Wilson Tan, CEO of CapitaMall Trust - winner of SCGA 2014 - also expects minimal impact from the potential interest rate rise.
"As part of our proactive capital management, we continue to actively manage our financing costs, diversify our sources of funding to include a variety of instruments denominated in different currencies, and reduce the lumpiness of debts maturing in any one year," said Mr Tan.
In July 2002, CMT was the first Reit to be listed on the Singapore Exchange (SGX); and in September this year, credit rating firm Moody's Investors Service gave the trust a stable outlook and the highest rating ever to be assigned to a Singapore Reit - A2.
The most significant challenge to CMT is not QE's end, but the ongoing labour shortage and rising wages in the retail and food & beverage (F&B) sectors, which is dampening expansion plans. Currently, comprising 27.7 per cent of the trust's portfolio, F&B is the largest contributor of its gross rental income, followed by fashion, which accounts for 14.8 per cent of their portfolio.
Yet Mr Tan is confident that the growing household income and a low unemployment rate will continue to underpin retail spending. Afterall, CMT's portfolio of malls largely cater to necessity shopping, and are less affected by the recent decrease in tourist arrivals. And with an approximate 14.8 per cent interest in CapitaRetail China Trust (CRCT), the first China shopping mall Reit listed on SGX, it allows the trust to "enjoy the upside from China's growth potential without significantly altering CMT's risk profile".
But given the variety of trusts in Singapore, the reduction in tourism is bound to impact trusts in other sectors. For CDL Hospitality Trust, whose performance is largely dependent on tourism, the reduction in tourist arrivals has hit its hotel business on two fronts.
First, there was restraint on corporate travel as companies maintained their cautious stance due to uncertainty surrounding the state of the global economy. Secondly, the unexpected drop in Chinese tourists has also negatively impacted hotel performance islandwide.
But rising interest rates that comes with QE's end is not expected to change much. According to CDL CEO Vincent Yeo, the trust's strategy has always been to establish a reasonable proportion of fixed-rate debt and stagger the maturity levels of its debts.
With the recent investment-grade rating given to CDL by financial services firm Fitch Ratings - BBB-/stable - Mr Yeo felt that the trust's operating profile is "likely to remain stable in the near term".
"From an earnings perspective, we believe our strong balance sheet and prudent capital management will keep us in good stead and provide our investors with earnings visibility in the near to medium term," he said.
As for Mapletree Industrial Trust (MIT), CEO Tham Kuo Wei said that the trust has sufficient facilities to refinance reborrowings due in FY14/15, and has fixed 77 per cent of total borrowings via interest rate swaps and fixed rate borrowings as at Sept 30, 2014. "This will minimise the impact of rising interest rates on distributions," he added.
The firm's current gearing ratio sits at a conservative 33.1 per cent, meaning that it has the capability to take on debt-funded acquisitions when the opportunities arise.
The industrial market in Singapore, however, has become more competitive with acquisitions, partly due to the increasing number of new industrial players vying for assets, said Mr Tham.
In fact, the only acquisition that MIT made over the last three years was the purchase of a S$14 million four-storey light industrial building in May this year. But MIT, with 85 properties in five property segments, has been focusing on build-to-suit and asset-enhancement projects, which when completed, in Mr Tham's opinion, will contribute to further growth for the trust.
Yet the large supply of space from the government's industrial land sales programme could possibly exert downward pressure on rental rates over the short to medium term.
"While the full impact is unknown, the downside risk for MIT is mitigated as demand for most MIT properties remains healthy," he said.