Will Ascendas Real Estate Investment Trust Become A Riskier Investment In The Future?

Credit: Yoshi Canopus

Ascendas Real Estate International Trust (SGX: A17U) is currently the largest business space and industrial real estate investment trust in Singapore. With more than 100 properties in Singapore and 2 business parks in China, the REIT’s total assets amount to more than S$8.2 billion (as of 31 March 2015).

But even with its dominance in Singapore and its potential opportunities in China, is there still a possibility that the REIT will become a riskier trust for investors to own in the future?

The major risks

Thing is, the Singapore government’s plan to restructure the economy partly by moving lower-value industrial activities out of here might cause a shift in demand for industrial properties in the future.

According to Ascendas REIT’s latest annual report for the financial year ended 31 March 2014, 17% of the lettable area in its portfolio is occupied by companies involved with conventional manufacturing activities. These tenants might be at risk of being forced out of Singapore in the years ahead and that’s something investors have to keep in mind when thinking about the prospects of Ascendas REIT.

Meanwhile, Ascendas REIT also has a desire to expand its presence in China. The REIT already has two business parks there as mentioned earlier, but the country’s still a relatively new market for the REIT and entering a new market always comes with risks.

If the expansion is not executed well, the decision to enter China might even become a headache for Ascendas REIT in the future. Unlike a company, REITs in Singapore have to pay out most of their income every year as distributions to their unit-holders; as such, REITs can hardly retain their earnings to boost the strength of their balance sheets. In light of that, Ascendas REIT might not have a balance sheet that’s strong enough to withstand strong negative impacts.

Some advantages

It’s not just gloom ahead for Ascendas REIT though. If the expansion into China is handled well, Ascendas REIT can gain an important new market and imbue its income streams with some geographical diversification.

More important, the growth potential in China would likely be far greater than anything Singapore’s market has to offer. So, the potential for growth is indeed immense, if things work out well there.

Foolish Takeaway

Every opportunity comes with its own set of risks. Ascendas REIT has done well over the years in Singapore to become the largest owner of industrial real estate here today. But, with the REIT now facing a possible slowdown in Singapore, the expansion into China can be both a blessing and a curse. Investors might want to watch Ascendas REIT’s developments in China closely.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.