The levels of borrowings among real estate investment trusts (Reits) are rising. Out of 16 Singapore Reits, about 10 had a higher aggregate leverage or gearing ratios as of end December 2010 than in the previous year.
Many Reits had relied significantly on debt to support growth, until the onset of the worldwide recession in 2008, which forced them to reduce borrowings. Investors feared highly-leveraged Reits, worried that they would fail without enough financing.
However, this is not the case anymore. For instance, the shifting level of the indebtedness of Ascendas REIT (A-Reit) shows how tolerance for debt among Reit investors — and in the industry — has changed.
From 2008 to 2009, A-Reit struggled to lower its aggregate leverage from 42 to 31 percent through various capital management strategies such as equity fund raisings. However, with the growth of the economy last year and improvement of credit markets, aggregate leverage crept up to 35 percent by end 2010.
Some Reits have seen slight debt-to-asset increases. CDL Hospitality Trusts, for example, has maintained a relatively conservative debt profile over the past few years.
However, many other Reits took on greater debt to fund inorganic growth. “2010 was the most active year for new asset acquisitions that the market has seen in years,” said Jason Kern, Managing Director and Head of Real Estate Investment Banking for Asia Pacific at HSBC.
“We are seeing more office Reits shoring up their aggregate leverage ratios,” said Ong Kian Lin, an analyst with OCBC Investment Research. ‘We think that 40 per cent will be the new norm for FY2011.”
The low cost of debt, underpinned by sustained near-zero interest rates in the US, has facilitated borrowing.
The majority of Reits “are quite comfortable with the credit conditions”, said Janice Ding, an analyst at CIMB. She expects that the average aggregate leverage among Reits could hit the 30 percent range.