[ET Net News Agency, 4 October 2018] A sudden and sharp rise in interest rates could
shake some Asia-Pacific REITs, according a scenario analysis conducted by S&P Global
Ratings, titled, "When The Cycle Turns: Asia-Pacific REITs Build A Rating Buffer As
Interest Rates Rise."
"We believe that most Asia-Pacific REITs we rate can absorb a gradual increase in rates,
given their robust interest coverage metrics, limited amount of floating-rate debt, and
modest upcoming maturities," said S&P Global Ratings credit analyst Craig Parker.
"However, under severe stress scenarios of an interest rate jump of 200 basis points
(bps) and 300 bps, a small number of entities that have an overweight exposure to floating
interest rates would face ratings pressure." he added.
Asia-Pacific REITs' prudent financial stance has built a buffer for the ratings to
withstand debt-funded growth and economic shocks. The notional average rating is 'A-' for
the 58 rated REITs in the major Asia-Pacific real estate markets of Australia, China, Hong
Kong, Japan, and Singapore, the credit rating agency said.
S&P's ratings factor in the likelihood that banks will pass on their higher cost of
funding given its expectation of a moderate increase in interest rates. Still, rising
interest rates and tighter funding conditions pose key risks across Asia-Pacific real
estate markets.
S&P's study therefore tested Asia-Pacific REITs' credit quality under three stress
scenarios of interest rates surging by 100 bps, 200 bps, and 300 bps. In addition, the
agency tested the asset bases of these entities to determine the impact on their
loan-to-value measures, given that this is a common debt covenant for REITs.
It found that most rated Asia-Pacific entities are well positioned to cope with these
external shocks because they have fixed a greater portion of their debt book amid low
interest rates. Their liquidity positions are either strong or adequate, reflecting
prudent treasury management. (KL)