Strong Asia Pacific REITS will weather economic storms

Strong Asia Pacific REITS will weather economic stormsStrong asset quality and solid market positions put the region’s real estate investment trusts in the box seat to take advantage of future economic shocks, says ratings agency Standard & Poor’s.S&P Global says a large number of rated REITs throughout the Asia Pacific incorporate a ‘rating buffer’ which would enable them to debt fund growth opportunities and weather the ups and downs of commercial real estate markets. S&P’s report notes that the major commercial real estate markets of Australia, Hong Kong, and Singapore are experiencing subdued rental growth, offset by substantial capital appreciation partly due to buoyant investment flows. S&P analysts Craig Parker and Graeme Ferguson say “patchy” tenant demand and limited growth in rents in Australia’s commercial real estate market have “contributed to a number of properties attracting lower rent rates when leases are renewed”.However, strong investor demand, as evidenced by a number of large portfolio transactions in the office and industrial sector, has squeezed capitalisation rates, which have reached pre-GFC levels.”Unlisted capital has usually been the winning bidder for property assets, comprising largely foreign investors who have been driving demand at the upper end of the market,” Parker and Ferguson explain.Across the retail sector, there have been “modest” amounts of additional supply, but “the uplift in asset values has been tempered by the soft leasing environment”.For office properties, Parker and Ferguson argue that a “benign supply outlook” over the next few years in many markets should “allow incentives to begin to normalise, effective rents to firm, and vacancy levels to tighten”. The industrial sector faces low supply, due to a diminishing supply of land. While stronger entities are looking to construct stock, and the majority of the new supply is pre-committed, subdued economic conditions are likely to dampen rentals.S&P finds that REITs are well placed to “take advantage of a potential dislocation in their local real estate markets”, such as another global financial crisis, a slowdown in economic growth or a hike in interest rates.