Analysts say REITs are good defensive play in current climate

Source : Channel NewsAsia - 22 Sep 2008

Singapore REITs have been massively sold off since the start of the year - down some 36 per cent on average to date.

This is in line with property developers, whose stocks have fallen some 44 per cent since January.

In comparison the STI is only down about 24 per cent.

But analysts say REITs may be a good defensive play in the current turbulent climate.

Property prices and rental costs have been on the decline this year, with the stock price of developers and investment trusts following suit.

Head of research & consultancy at Chesterton, Colin Tan, said, “Usually REITs is all about property. If prices are declining I’d think you have to move down a bit.”

He said that while rents are locked down for the time being, REITs will eventually be exposed to property market declines.

But others say there is reason to be positive, especially if one looks at REITs in terms of yield and distribution per unit (DPU).

Investment analyst of DMG & Partners, Brandon Lee, said, “What’s persuasive is, we can draw comfort from what happened in the last quarter. Results were pretty healthy at about 33 per cent year to year growth in DPU. Going forward we believe earnings momentum should carry on into the next 1.5 years.

“If you look into the tenure of the leases signed a few years back, even last year or first half this year, they should continue on to the next 1.5 years.”

On top of that, refinancing concerns have been eased somewhat, with most REITs having refinanced within a relatively healthy range of 2.5 to 4 per cent. But not all REITs are equal. DMG prefers those with organic growth drivers, as the acquisition potential of REITs dries up along with liquidity.

Lee said, “My top pick now is Suntec REIT. The investment case is basically the organic growth boosters in the form of positive rental reversions.

“If you look at its current lease in the profile, about 44 per cent of its office spaces are for rental this year and these are paying at S$5 to S$6. If you assume conservative estimates of S$12 - S$15 psf per month it gives you a clear picture on how well it’s going to fare in terms of DPU growth. And aside from that, refinancing concerns for this REIT have also been extinguished.”

Lee’s target price for Suntec REIT is at S$1.87.

Analysts note however, that like all investments, REITs are exposed to macroeconomic conditions beyond the control of their managers.

Asset devaluations and widening interest rate spreads are potential threats, although DMG says softening interest rates from easing inflation and slowing economic growth could cushion the impact.