Yong Yean Chau CEO, Parkway Trust Management Manager of Parkway Life Reit

THE past months have been very challenging for the world at large. Impacted by the unprecedented market turbulence affecting economies globally, the Singapore economy is estimated to only have grown by 1.2 per cent in 2008, compared to 7.7 per cent in 2007. Latest figures from the Ministry of Trade and Industry reveal that Singapore's economy is now expected to contract by up to 5 per cent in 2009.

It appears that no industry will be spared. Even the Reit sector, which is known to be relatively defensive, is facing challenges of its own, such as refinancing risks and the downward pressure on rental revenue and asset valuations, which will adversely impact a Reit's gearing ratio.

With tight credit lines, Reits are expected to turn to equity fund raising. In fact, Reits including A-Reit, Saizen Reit and CapitaMall Trust have all announced rights issues over the recent months.

While many of these Reits have or are likely to succeed in their fundraising exercises, analysts and industry watchers note that there are still risks out there. Reits continue to face rising costs of debt. Many are saddled with high gearing levels. Still others have been hit with rising aggregate leverage levels, simply as a result of declining property valuations. Ultimately, such symptoms will impact a Reit's ability to maintain DPU payouts and even raises questions on its ability to survive.

The fact is, not all Reits are facing the same challenges. It is time to sift the wheat from the chaff. Investors need to cast a more critical eye when evaluating the Singapore Reit sector. Rather than looking at the sector as a whole, investors need to understand the strengths and weaknesses of individual Reits. In the end, every downturn has an upside. Investors who pick the right choices can be prepared to ride the upswing, when it eventually arrives.

For Reits, this is a time when strong balance sheets and prudent capital management will be put to the test like never before. Those Reits that have taken proactive steps such as converting short-term credit facilities to long-term facilities will have some room to breathe in the current environment. In such cases, Reits that do not face refinancing pressure will more likely be able to maintain distribution payouts to unitholders and weather the current economic storm.

Rental agreements are another factor to consider for Reits. Clearly, Reits with long rental agreements such as over 10 years will provide investors with the comfort of a stable income stream. Additional measures can also be put in place, such as back-up clauses and rental guarantees. In today's deflationary environment, rental agreements with a consumer price index formula that provides downside protection will be an added boost. Investors need to understand the robustness of rental agreements of Reits to be assured of the long-term stability of the rental income stream and DPU payouts.

Further, not all Reit assets face falling valuations. Property valuations in certain sectors are hit harder than in others. For example, healthcare property valuations have proven to be more stable due to the resilience of the healthcare industry. Recent independent valuations done on Parkway Life Reit's portfolio have revealed that the portfolio size remained at a steady state of $1.05 billion. As such, our aggregate leverage was kept low and credit ratings were not affected.

Finally, it is important to understand the sectors that Reits play in, such as industrial, retail or healthcare. In the case of healthcare Reits, there are two players in the Singapore market, namely, First Reit and Parkway Life Reit. While the private healthcare market has been impacted by the current environment, long-term demand for healthcare remains strong.

According to estimates by Frost & Sullivan Asia Pacific, the Asian Healthcare market in 2008 is valued at approximately US$240 billion, and is expected to grow by five to 10 in 2009.

In Singapore, private healthcare expenditure has been increasing at a CAGR of 4.76 per cent over 2000 to 2007. The medical tourism industry in Singapore is also expected to grow at a CAGR of 9.1 per cent through 2012 to generate revenue of nearly US$1.7 billion .

According to Frost & Sullivan, ageing populations and the increase in chronic cases and lifestyle illnesses will be the two main factors underpinning the demand for healthcare services in Asia Pacific. As a result, the need for healthcare real estate assets such as hospitals and nursing homes not only in Singapore, but also in other key destinations including China, India, Japan, Malaysia, Taiwan, Australia and Thailand, will continue to grow.

As the CEO of Parkway Life Reit, I am mindful of the challenges ahead, but also look forward to be able to differentiate and strengthen the value proposition of Parkway Life Reit. Ultimately, investors and our unitholders can decide on whether they have made the right choices. Those who have taken the pains to understand the various Reits more clearly, will realise that there are treasures to be uncovered and rewards to be reaped. It is just a matter of time.

This article was first published in The Business Times.