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