Wednesday, May 3, 2023

Challenging Times for Reit Managers Ahead

The Business Times published an opinion article today titled, "Reit managers, take note: General mandate to issue new units is least popular resolution at S-Reit AGMs" [link]. It described how Sabana Industrial Reit unitholders rejected the resolution for the Reit Manager to issue new units and to make or grant convertible instruments without the expressed approval of unitholders.

Sabana Industrial Reit has been embroiled in a hostile battle between the Reit Manager and one of its investors, Quarz Capital. But having a resolution voted down is rare. Other Reit Managers ought to sit up and take notice.

Since the GFC, Reits have prospered in the ultra-low interest rate environment, where debt can be obtained at a relatively low cost. Consequently, Reits have been able to provide enviable returns to investors. With the rapid ramp-up of interest rates, this era of cheap debt is over. The cost of capital is going to creep up, regardless of how much Reit Managers tout that a major portion of their debt is in 'fixed' rates. Eventually, more of the revenue will be needed to service interest expense.

Reit Managers may also face scrutiny when trying to raise money via private issuance of new units.

If Reit Managers cannnot raise rental rates correspondingly at the risk of losing anchor tenants, then investors will have to settle for less.

The next ten years will be nothing like the last ten years.

Do take note.

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