Source : Business Times - 11 Oct 2008
As prices fall and yields climb, Singapore Reits are gaining favour with analysts. By Uma Shankari
SINGAPORE-LISTED real estate investment trusts, or S-Reits, are back in favour with analysts. Just a year ago, they were urging investors to turn their backs on Reits as concerns emerged about their ability to refinance debt amid the looming credit crunch. There were also fears that with funding hard to come by, acquisition growth had pretty much dried up.
But now these same S-Reits are being hailed as a source of stable, visible and recurrent income in uncertain times - and definitely seem to be better bets than developer stocks.
UOB Kay Hian analyst Jonathan Koh, for example, upgraded S-Reits from market weight to overweight this month due to their ‘overwhelmingly attractive’ yield spread. According to him: ‘Reits provide recurrent dividend income, an attraction when opportunities for capital gain are scarce.’
S-Reits have borne the brunt of the stockmarket correction this year. UOB Kay Hian’s index of 14 Reits slid 16.9 per cent in H1 2008 and 27.2 per cent in Q3 - under-performing the Straits Times Index, which shed 14.9 per cent in H1 08 and 19.9 per cent in Q3.
Reits here have been affected by tightening credit markets and higher interest rates, which have resulted in higher borrowing costs. But JPMorgan analysts Joy Wang and Christopher Gee say the Reit model is not broken.
The S-Reit sector enjoyed exceptional growth from 2003-2007, fuelled largely by cheap funding. As a result, S-Reits became too focused on inorganic growth. In particular, those with sponsor pipelines - such as CapitaLand’s many Reits - aggressively snapped up assets on the back of the cheap capital readily available to them.
But the global credit crunch put the brakes on the S-Reit growth cycle. Many acquisitions are no longer accretive, and the market seems to have become concerned that Reits will no longer be able to acquire assets, even from sponsor pipelines.
Smaller and less liquid vehicles such as CapitaRetail China Trust (CRCT) seem to have lost their attraction with investors and become less relevant to the market.
But JPMorgan’s Ms Wang and Mr Gee reckon this view is too pessimistic. ‘When capital was cheap and easy to obtain, less focus was on the fundamentals of real estate and management skill sets,’ the analysts said in an Oct 7 report. ‘Going forward, we expect the market to differentiate and focus on Reits with quality underlying assets, resilient cash flow and capable management teams.’
JPMorgan has ‘buy’ calls on seven S-Reits, including CRCT.
Analysts also feel S-Reits look attractive given their current yields and the steep discounts to book they are trading at.
UOB Kay Hian’s Mr Koh notes that the weighted average yield for Singapore Reits has shot up to 8.8 per cent in the current market correction, moving to almost two standard deviations above the mean of 6 per cent. The correction in the share prices of S-Reits has brought yield spread against 10-year government bonds up to a historic high of 5.5 per cent.
S-Reits are also trading at vast discounts to their net asset value (NAV). UOB Kay Hian’s analysis shows S-Reits are trading at a massive 39 per cent discount to book NAV - more than two standard deviations below the mean discount of 3 per cent. The average discount to NAV is steepest for office Reits at 60.5 per cent, versus 35.1 per cent for retail Reits and 30.3 per cent for industrial Reits.
UOB Kay Hian’s top S-Reit picks are Ascendas Reit, CapitaCommercial Trust, Frasers Centrepoint Trust and Suntec Reit.
But there are still areas of concern in the S-Reit sector. Debt refinancing will remain a key issue in 2009, when a chunky $4 billion worth of S-Reit debt is slated to expire, analysts say. ‘While there is no evidence that Reits have severe trouble mobilising funds from the debt market for refinancing purposes, we believe subsequent refinancing will certainly come at higher cost,’ says Jonathan Ng of BNP Paribas.
Refinancing for three-year debt, which most Reits will likely undertake, will likely vary between 4.0 and 4.5 per cent under current conditions - up by 50-100 basis points, says Mr Ng.
After imputing higher cost-of-debt assumptions and moderating underlying assumptions for occupancy and revenue per available room for FY09-10, Mr Ng has cut the target price for all seven S-Reits BNP Paribas tracks by 14 to 35 per cent.
He maintains his ‘neutral’ weighting on the sector as ‘valuations are undemanding’. The sector now trades at an average 40 per cent discount to NAV and FY09 estimated yield of 9.3 per cent, implying a generous 600 basis point spread over the 10-year government bond, he says.
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