The recent Australian acquisitions by Singapore REITs may be beneficial but could add risks, according to Fitch Ratings.
Fitch Ratings’ latest report entitled ’Australian Acquisitions Benefit S-REITs But Add Risks’, maintains that although there are benefits to the offshore acquisitions from the consequent geographic and cash flow diversification, such expansion needs to be managed well from a property management viewpoint and with prudent balance sheet management.
Recent Australian acquisitions by S-REITs have spanned real estate sectors across retail, office and hotel properties. Some of the notable Australian acquisition between October last year and March this year include Starhill Global REIT’s acquisition of the David Jones building in Perth, the acquisition of several Australian hotels by CDL Hospitality Trust and K-REIT Asia’s acquisition of a 50-percent interest in an office building at 275 George Street in Brisbane.
Peeyush Pallav, Director with Fitch’s REIT team, said “S-REITs are expected to benefit from a more diversified cashflow, arising from their Australian acquisitions, reducing their reliance on cashflows from a single market in Singapore.”
“Furthermore, outside of Singapore, Australian markets benefit from a well established legal framework and liquid property markets in comparison to many other Asian countries,” he added.
The effect of Australian acquisitions on the credit profiles of S-REITs is expected to be diverse, depending on the acquired asset as well as the funding, hedging and property management strategies adopted.
Such expansion involves benefits like tenant diversification and the cashflow. However, it may increase the risks in terms of exchange rate volatility impacting both capital values and income streams, and a newer market potentially less understood by external investors.
Fitch expects the management’s track record in managing offshore expansion, as well as competence in managing a particular type of assets, to play an important role in its analysis of the acquisition impact on the credit profiles of S-REITs.
Fitch pays attention to the funding strategies adopted for such acquisitions, as large debt funded acquisitions can raise the influence for S-REITs drastically, and could unfavourably impact their abilities to service their debts.
Fitch is also expecting the S-REITs to establish suitable treasury management processes to handle currency exposures, as well as the exchange risks inherent in the cash flows growing in different currencies.
It will continue to check the growth strategies adopted by S-REITs, as they come out of the crisis and seem to expand further and take suitable credit action should this be required.