Property trust sector expected to be stable

The ever-closer prospect of higher interest rates has thrown a pall of gloom over local property trusts, but a new report gives a more optimistic outlook. Moody's Investors Service deems the sector "stable" in 2014, indicating that investors' fears are exaggerated. But those fears have taken their toll, turning S-Reits - as local real estate investment trusts are known - from stand-out performers to under-performers this year. 

The spectre of the United States Federal Reserve cutting back its stimulus plan will mean higher interest rates both in the US and Singapore. That, in turn, will increase costs for Reits here and crimp the healthy payouts they have been making. The concerns among investors have helped send the FTSE ST Reit Index down over 10 per cent this year. But Moody's noted in a report out on Monday that while rising rates lead to higher borrowing costs, more than half of the debts of the 13 rated S-reits are tied to fixed rates. 

The international rating agency also believes the sector may be insulated from rising rates because of low refinancing obligations. Most of their debt maturities are well spread out with no more than 30 per cent needing to be refinanced in a single year. The Moody's report essentially underlines what it said in a report issued three months ago. 

But while refinancing is manageable, it said the level of risk among the S-reits varies. Suntec Reit, which has about $750 million of debt due next year, has the highest financing risk, although Moody's noted that it has a strong funding track record, even through the global financial crisis. The least worrying in this regard is Mapletree Greater China Commercial Trust, which has no debt due until 2016. 

Moody's expects the sector's earnings before interest, tax, depreciation and amortisation to grow 4 per cent in 2014, "fuelled by larger asset base and rent increases on existing properties". "Overall, occupancy and rental rates will remain stable, supported by a manageable pipeline of new supply across most segments and proactive lease management to pre-commit rentals in advance of expiry," it added. It expects office occupancy rates to improve on the back of tight supply, particularly in the central business district (CBD), where new space will be limited next year and with nothing in the pipeline for 2015. 

The amount of space coming onstream in the CBD - where giants like CapitaCommercial Trust and Keppel Reit derive most of their income - next year is expected to fall below the five-year average take-up rate for offices. That could mean rents, which bottomed this year, are likely to recover gradually in 2014. 

As for retail space, despite a large supply in suburban areas - where CapitaMall Trust and Frasers Centrepoint Trust have the greatest exposure - Moody's expects occupancy and rental rates to remain stable, supported by rising gross domestic product per capita and higher tourism receipts. 

Similarly, business and science parks - where Ascendas Reit has the largest exposure - are largely expected to see stable occupancy and rental rates, as about 71 per cent of the upcoming space has already been taken up. On the other hand, a sharp spike in new warehouse supply could weigh down occupancy and rents, said Moody's. Mapletree Logistics Trust and Cache Logistics Trust have the largest exposure in this area.