Trusts have been tightening their belts on expectations that interest rates could rise over the next few years, which would have major repercussions as borrowing costs are a major component of their expenses, said S&P credit analyst Craig Parker.
“Trusts with sizeable debt exposure to floating interest rates are likely to suffer most.
“The severity of the impact will depend on the buffer that each Reit has relative to its financial policy,” Mr Parker noted.
“Still, we expect that rated Asia-Pacific Reits can largely shoulder the higher interest burden. The Reits are attempting to cut their interest costs and extending their debt tenors.
“They are also refinancing expensive debt incurred during the height of the global financial crisis at reduced rates.
“Furthermore, Reit managers are still holding back even though they have room to borrow substantially more.”
S&P upgraded CapitaCommercial Trust to A-/Stable due to an improving business profile and a more favourable view of its credit metrics. The ratings service also upgraded HongKong Land Holdings and HongKong Land Co to A/Stable due to its reassessment of their financial risk policies.
Growth in rental demand and rates here have been flat or slightly sluggish this year for properties in Reits rated by S&P.
“Nevertheless, we project a stable credit outlook for the Reits we rate,” said Mr Parker.
“The Reits have amassed high-quality portfolios that can withstand economic headwinds better than lesser-quality properties held by their competitors, sustaining their credit quality despite sluggish rental growth.”
Limited new retail assets in the near term will sustain high occupancy at most suburban malls in Singapore.
But retail rental growth has been subdued due to slowing tourist arrivals, he noted.
Meanwhile, office and industrial rents here are approaching peak levels, Mr Parker said.
Industrial rents have been strong and capital values have increased, with vacancy rates falling from a peak of 14 per cent in 2006 to 9.5 per cent this year.