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Rating Considerations for Real Estate Investment Trusts

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Real Estate Investment Trust (REIT) is a Corporation or Trust that utilises the pooled capital of multiple investors to purchase, and in most cases, operate income-generating real estates such as offices, shopping complexes, hotels and warehouses. REITs provide the investors with an investment avenue that is comparatively less risky (because of investment in completed properties and in a wide number of properties) than investing in under-construction properties and provides regular income. REITs provide the sponsor (a developer or a private equity fund) long-term capital, avenues of exit and enable them to invest in other projects. REITs enhance growth in the real estate industry globally.

Operators in REITs include:

  • Sponsor/Investors who invest in REIT and receive as their rewards dividends and distributions.
  • Trustee who manages REIT and receives trustee’s fee.
  • Lenders who provide loans and receive interest.
  • Managers who manage REITs’ assets and receive manager’s fee.
  • Holding Company is set up by a REIT to manage SPV assets to generate rental income. REIT can also own the asset directly and receive rental income.

Rating considerations of REITs focus on the following:

  1. The rating of debt at REIT level or at SPV level should be an opinion on the repayment capacity of Real Estate  in a timely manner.  The rating neither signifies the returns to the unit holders nor does it signify any potential yield levels to the unit holders, and thereby should not be construed as a rating of REIT’s units. It is an indicator of the credit quality of the portfolio of assets that are part of the REIT’s portfolio. The ratings neither predict a specific level or range of performance of a REIT (measured in terms of the net asset value or otherwise) over any given time period nor do they opine on the suitability or otherwise of a REIT for investment or any other purposes. REIT rating is not a measure of the adequacy of market value nor does it address the extent to which trust expenses and costs may reduce distributions to the unit holders.
  2. Rating of the operators in REITs. This is organised into three broad areas of management evaluation, operational risk assessment and financial risk assessment.
  • Management Evaluation focuses on the experience and track record of REIT managers, asset acquisition/diversification strategy, and overall, REIT structure.
  • Operational Risk Assessment evaluates location, type of asset & quality of construction; market standing; demand and supply outlook in the micro market; occupancy level; tenants’ profile assessment; and evaluation of lease agreements.
  • Financial Risk Assessment concerns liquidity; debt financing and terms of sanction; leverage and capital structure cash flow analysis.

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