Source : Business Times – 18 Jul 2009
REAL estate investment trusts (Reits) are expected to report lacklustre earnings for the second quarter on the back of falling occupancies and rents across their portfolios.
And Reits that have made rights issues – such as CapitaMall Trust, CapitaCommercial Trust and Ascendas Real Estate Investment Trust – will also see year-on-year falls in distribution per unit (DPU) on the back of earnings dilutions.
But not all Reits will be hurt equally. How well a Reit fares depends on its sector, as well its tenant base.
Sector-wise, the consensus among analysts is that hospitality Reits will be hit the hardest.
Kim Eng analyst Anni Kum believes that CDL Hospitality Trusts could see its net property income (NPI) fall. ‘Given the impact of H1N1 and the weak tourist numbers, we can expect a weak Q2 and Q3,’ she said.
The trust, which is a unit of City Developments, saw NPI fall 21 per cent for the quarter ended March 31 on the back of softening tourist, MICE (meetings, incentives, conventions and exhibitions) and business travel arising from the global economic slowdown.
Analysts also reckon that Ascott Residence Trust could see NPI fall on the back of lower rents, although occupancies at its properties have not been affected too badly, as its model is based on longer-term leases.
Office and industrial Reits will not be spared, analysts feel. ‘Amid a rapid deterioration in the economy, the office sector has seen a faster-than-anticipated contraction in occupancy and a greater decline in office rents than previously thought,’ Nomura Research said in a recent report.
DTZ Research reported recently that office rents in Raffles Place fell 19 per cent in Q2, after sinking 25 per cent in Q1.
But many office and industrial landlords here are still charging passing rents that are lower than market rents, which means that new leases could still be signed at higher rates than Reits were charging before. This should cushion a fall in NPI.
However, occupancy rates fell further in Q2. DTZ’s data also showed that office occupancies were hit further, though at a slower rate than in Q1. DTZ said that the island-wide average office occupancy rate eased 0.9 of a percentage point to 92.8 per cent – less than the 1.9 percentage point contraction in Q1.
This is where a Reit’s tenant portfolio can make a difference, said one analyst. Office Reits with just a few leases up for renewal this year will be better off than those that will see a large proportion of their tenants reach the end of their leases. The same applies for industrial Reits.
Retail Reits, in contrast, seem to be better off. While retail sales here have been hit and rents have fallen since the start of the year, vacancy rates in the retail sector remain low. Mall owners have also pointed out that the pace of rental decline slowed in Q2. Data from DTZ, for example, shows that prime first-storey rents in the Orchard/Scotts Road area fell 0.8 per cent in Q2, a slower pace of decline after their 4.8 per cent dip in Q1.
One bright spot in the Reit sector is that trusts that started asset enhancement works during the property boom years could see some pay-off from their investments soon.
Frasers Centrepoint Trust (FCT), for example, started asset enhancement works at Northpoint last year. These are expected to be completed soon, as tenants are now fitting out their premises. Post-completion, FCT’s NPI will be lifted 7 per cent from FY 2010 onwards, DBS Vickers estimates.
Of course, for most Reits, the danger of further asset writedowns remains, as capital values keep falling. A few Reits are due to do their semi-annual valuations in Q2.
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