We have gotten several queries from our readers regarding First Real Estate Investment Trust’s (FREIT) unexpected correction recently, where the stock plunged to S$0.96/share at one point, down 18% in a day. The sharp decline seems to be linked to the Fitch’s downgrade of PT Lippo Karawaci (LPKR) to CCC+ (down from B) on 5 Nov 2018. Lippo Karawaci is the sponsor and main master tenant of First REIT’s properties.

The knee jerk correction is probably due to concerns over LPKR’s liquidity issues and recent allegations of its corruption case pertaining to the Meikarta Project. LPKR’s liquidity is indeed tight, as it has to start selling off non-core assets to repay its debt given the weak property outlook in Indonesia. However, I felt this is largely an overreaction on FREIT and the repercussions may not be as dire as the situation shows. Let’s take a step back to ...