Asia-Pacific rated real estate investment trusts and real estate operating companies (collectively ‘REITs’) have toughened up in the aftermath of the global financial crisis. They have repaired their balance sheets, adopted more conservative financial profiles, and diversified their funding sources. However, contagion from Europe could unleash more anxiety to already jittery credit markets in Asia Pacific. Banks and other lenders in the region are already paying more to insure their debt financing, as seen in the widening real-estate credit default spreads (CDS). Coupled with stricter regulatory requirements, bank loans may come with higher interest rates, and consequently, more expensive financing for REITs, as they rely mainly on bank debt for short-to-medium-term financing. Nevertheless, Standard & Poor’s Ratings Services considers that in the short term, the majority of our rated REITs in Asia Pacific are well placed to face the potentially tougher conditions.
Indeed, Asia-Pacific real estate entities rated by Standard & Poor’s, whose assets range from malls to skyscrapers, remain largely entrenched in the investment-grade rating category. The majority of the 38 issuers we rate in the region are clustered around the ‘A’ category (see chart 3). This narrow dispersion reflects the strength of our rated universe, which is generally populated by REITs that benefit from solid asset bases, strong market positions, and predictable rental income streams. Another common trait of the region’s rated issuers is the predominance of stable rating outlooks (see chart 4); the small number of negative rating outlooks largely reflects company-specific transactions or liquidity issues (see table 1).
Furthermore, the sector has taken concrete steps to counter potentially lower leasing demand and retail sales due to declining consumer sentiment. Apart from more conservative financial profiles, they have staggered their debt refinancing and maintained high occupancy levels for their property portfolios. REIT managers remain disciplined, purchasing assets that meet their investment criteria and provide stabilized rental income. Importantly, we are not expecting sizable impacts on the supply/demand fundamentals for the real estate markets in Australia, Singapore, and Hong Kong. The Japanese real estate market continues to face headwinds, and for our rated Japan REITS (J-REITs), we expect that vacancy levels have bottomed out and improved leasing conditions will return in 2012.
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