REIT ASIAPAC MAGAZINE REITASIAPAC AUGUST 2020 ISSUE | Page 13

SURVEY
Formosa International Hotels Business, said in a Forbes
article that he expects business “to be very challenging” from
oversupply created in an era of low interest rates and easy
financing. “There will be a huge – probably the biggest—
consolidation” of hotel assets in the coming decade, he said.
6. SOME REITS COULD
BREACH LEVERAGE LIMITS
Q
Do you see the potential for REITs to breach leverage
limits or even potentially run into insolvency as a
result of Covid-19 pandemic?
As business conditions deteriorate, the negative impact on
REITs will likely continue to worsen until the economy can be
reopened to resume normal operations.
levels of the Cosco Tower in Sheung Wan area for 45% less
than the asking price three months earlier.
Most fund managers agree that current real estate valuations
are still high. “They ought to be marked to market, taking
government bond/interest rates into account,” one asset
manager said.
“[Assets are] overpriced across all sectors so [we] will see
cap rates soften. Those with more cash flow pressure can
expect larger declines. Industrial/logistics may compress, but
looks very expensive relative to others,” a fund manager in
Australia said.
“Valuations in direct real estate will fall, with the magnitude
of the fall depending on what sector you’re talking about.
REIT valuations have already adjusted for a lot of that nearterm
downside,” a Singapore-based investor said.
“[We are] expecting some decline in value due to cyclical
reasons like weaker economic growth,” said Maydew. “Some
hotel and retail REITs have reported double-digit mark
downs in property values. Longer term, valuations should
reflect economic value that will be impacted tactically and
structurally by Covid,” said another.
Retail, office, and hotel assets have downside risks, said
Shinkawa. Separately, Steven Pan, chairman of Taiwan-listed
In Singapore, REITs’ leverage limit was raised from 45% to 50%
to allow S-REITs greater flexibility to manage their cash flows
and raise funds amid a challenging operating environment.
S-REITs were also given an extension of the deadline for
the distribution of least 90% of their taxable income from
3 months to 12 months after the end of Financial Year 2020
to qualify for tax transparency. While the measures will help
to mitigate cash flow impact, S&P Global has nevertheless
downgraded its ratings on Frasers Centrepoint Trust due to
the REIT’s heightened leverage and deteriorating cashflow
amid the pandemic.
In Japan, S&P Global said most of the J-REITs and real estate
companies it rates“have some financial buffer and adequate
liquidity to weather the storm.” After the global financial
crisis, J-REITs took steps to moderately improve leverage
levels, accumulate reserves, increase committed credit lines,
and diversify debt maturity profiles. Nonetheless, caution
is warranted because of the possible decline in real estate
prices, it said.
We asked investors if they see the potential for REITs to
breach leverage limits or even become insolvent as a result
of the financial and business impact from the Covid-19
pandemic. The responses were mixed.
Some investors commented that this is unlikely to occur in
Asia, with one fund manager saying “REITs can simply tap the
13