Singapore trusts keep an eye out in Australia

SINGAPORE’s real estate investment trusts’ are hungry for Australian commercial properties, according to an international ratings agency report.

Fitch Ratings said SREITs which have emerged from the global financial crisis and are on the prowl for yield‐accretive acquisitions have been forced to look offshore, mainly in Australia, because of the small size of the Singapore real estate market, and the concentrated portfolios.

Fitch said SREITs expanding into Australia will benefit from geographic diversification and stronger yields from Australian properties.

In the space of five months, from October 2009 to March 2010, SREITs were highly active in Australia. The main transactions;

• CDL Hospitality Trust (HREIT) buying several Australian hotels: Novotel Brisbane, Mercure Brisbane, Ibis Brisbane, Mercure Perth, and Ibis Perth for SGD220.9m. The acquisitions saw Singapore properties’ contribution to HREIT’s gross rental income fell from 90.0% to 76.8%.
• K-REIT Asia acquired a 50% interest in an office building at 275 George Street in Brisbane for SGD208.6m.
• Starhill Global REIT (Starhill) acquired the David Jones building in Perth for SGD145.7m. The property is expected to result in Australia contributing 9% of Starhill’s expected gross revenue.

However, the agency remains cognisant of the risks entailed in this expansion, including additional leverage, currency mismatches, and entry into newer, potentially unfamiliar markets and sectors.

According to Fitch, CDL Hospitality Trust’s acquisition was funded through a bridging loan of which 50% was in Singapore dollars and 50% in Australian dollars. It did not enter into additional currency or interest rate hedges for this loan. The debt funded acquisition led to an increase in HREIT’s gearing to 30.0% from 19.1%. KREIT Asia purchase was funded by equity proceeds from the rights issue completed in November 2009, which led to gearing falling to 25.2% from 27.7%. Starhill Global REIT’s buy was 55% funded by debt and 45% by equity.

The agency said a weaker Australian dollar and tight financing conditions for property acquisitions are key risks.

The agency noted that between April 30 and May 27 the Australian dollar depreciated by about 9%, highlighting the additional risk SREITs may be exposed to by investing in Australian assets.

“The impact of Australian acquisitions on the SREITs’ credit profiles is expected to be varied, depending on the assets acquired, and the funding, hedging and property management strategies adopted.

“Such expansion entails benefits like cash flow and tenant diversification, but also increases risks from markets that are potentially less understood by external investors, and exchange rate volatility affecting capital values and income streams,”

Meanwhile Fitch remains cautious about the Australian property sector.

The agency finance for property acquisitions remains tight, with funding continuing to be dominated by the four large Australian domestic banks.

“Nevertheless, the ability to obtain property financing for well tenanted, prime properties owned by large sponsors with good banking relationships appears to have improved during early 2010.

“Financing for non‐prime‐quality properties owned by smaller owners continues to prove difficult to obtain. It is in this non‐prime sector that Fitch continues to have continuing concerns about values,” Fitch concluded.

Australian Property Journal