The recent banking crisis in the US triggered by depositor flight from regional banks after the failure of Silicon Valley Bank and Signature Bank shed light on the unrealised losses on US Treasuries and other investments held for sale or to maturity by many banks. While some would argue this is another GFC moment, we believe that the regional bank crisis will really impact US CRE and other borrowers and not issuers in Asia directly. CMBS maturities come due and regional bank credit tightens. Trepp estimates that USD 448bn in maturing CRE loans will come due in 2023 and about USD 270bn are from banks. From 2023-2027 the amount is USD 2.56 trn with USD1.4tn with banks. Regional banks are disproportionately larger lenders to CRE versus Systemically Important Banks (SIBS) so erosion in their deposit base will limit their ability to refinance upcoming maturities. We have seen that RE made up a majority of the hold to maturity assets of SVB and others regional banks so it will be difficult to see SIBS filling the gap they leave. For us the current situation reminds us (I am old enough to remember) the S&L crisis of the late 1980-early 1990s than the GFC. During the GFC, large global banks that were present in Asia had to deleverage and left Asia leaving local banks to pick up the slack. Thankfully, Asian RE companies are not dependent on regional banks in the US or even US SIBS for that matter.

Asian REITs and corporations typically borrow from their local banks which are also systemically important in their countries (think DBS, SMBC, etc.) and are very well capitalised with strong depositor franchises. As a result, we do not see the impending credit crunch in the US impacting Asian RE companies directly. Of course, the resulting economic downturn that tight financial conditions will create in the US will have secondary effects on global growth and Asia cannot escape that, but there is a silver lining. The higher for longer narrative will be tested given the current strains on the regional banking system that plays a vital role in RE and main street financing in the US.

Asian REITs have been negatively impacted by inflation fighting by the Fed and their central banks (Japan excepted). USD strength has also been a headwind due to higher utility costs. If we can assume the Fed will need to pause and judge the impact of its hikes on the economy as well as challenges in its regional banking sector and, if the USD continues to weaken, this will take pressure off Central Banks in Asia. The reopening of the economies in Asia has led to improving operations especially in retail and hospitality yet share prices and DPU have been negatively impacted by higher interest and other cost expectations. In addition, some REIT counters where gearing is a tad high have started to price in pre-emptive capital raises as higher rates have lowered interest coverage and this has led to weak performance. Lower global growth may reduce pressure to raise rates further and help reduce the risk of dilutive capital raises and headwinds could flip into tailwinds as utility costs and risk free rates continue to fall and REITs may be able to tap equity markets with better cost of equity and hopefully accretively. While global growth may slow as a result of the challenges in the US, Asian REITs have not reflected the benefits of re-opening economies.

APREA Market Flash (March 2023)