Not all Reits are created equal

Source : Business Times – 24 Sep 2009

Volatile as the year might have been, the consensus on the inclusion of Reits in investment portfolios is favourable

AT FIRST glance, real estate investment trusts (Reits) watchers will be frustrated by the hung jury that has been the outcome for the first half of 2009. As of the end of August, of the 18 Reits with results in, half have reported distribution per unit (DPU) growth while the other half have reported an erosion of DPU.

Upon closer analysis, however, Phillip Securities analyst Lee Kok Joo noted that there are some sectors within the Reits area that have fared better than the rest. ‘The hospitality sector fared the worst with both Ascott Reit and CDL Hospitality Reit recording decrease in gross revenue as well as lower DPU,’ said Mr Lee in his report late last month.

Despite the blow dealt to the hospitality sector this year, a pickup in tourist arrivals is expected to help turn things around next year. DMG estimates that the weighted average yield for the hospitality Reit sector will pick up in FY2010 to 7.3 per cent, up from a forecast 6 per cent this year.

The industrial Reit sector also provided a reminder this year that DPUs and turnover could go in opposite directions. ‘For industrial sector, all four industrial Reits recorded lower DPU although only MacarthurCook Industrial Reit recorded lower gross revenue,’ Mr Lee added.

The office and retail sectors, however, have seen both revenue and DPU growing in tandem, benefiting from faster rent escalation and positive rental reversion from expiring leases, respectively.

Disparity where yields are concerned might be a good thing, however. OCBC Investment Research’s Meenal Kumar noted earlier this year in a report that ‘Suntec Reit is trading at a 300-point yield premium to CapitaCommercial Trust despite support from its retail portfolio and fairly similar gearing’, giving rise to arbitrage opportunities as soon as the smoke clears. ‘We do expect opportunities for yield arbitrage as the divergence corrects, especially as clarity increases on the office outlook,’ said Ms Kumar.

Volatile as the year might have been for Reits as an asset class, the consensus on its inclusion in investment portfolios is favourable.

A survey published by the Trust Company Ltd, a Sydney firm, found that real estate investment trusts in Singapore and Australia are expected to be the first in the region to regain ground lost during the economic downturn.

Singapore fared well in the survey because of optimistic prospects for growth of the property market, and great regulatory involvement on the part of the Monetary Authority of Singapore. However, Anthony Ryan, JPMorgan head of Asia real estate investment banking, cautioned investors against over-relying on the conventional wisdom of Reits being defensive plays.

At the CapitaLand International Forum earlier this month, he pointed out that in three separate periods – pre-crisis, during the crisis and post-crisis, Singapore Reits (S-Reits) have demonstrated an outstanding propensity to be high-beta investment vehicles.

During the ‘growth period’ of November 2005 to July 2007, S-Reits posted a compounded annual growth rate (CAGR) of 35 per cent, closely mimicking the Straits Times Index’s (STI) CAGR of 34 per cent. In the same period, Singapore property stocks posted a CAGR of 53 per cent.

During the sub-prime crisis, from July 2007 to December 2008, S-Reits promptly took the lead of Singapore property stocks, posting a CAGR of -43 per cent, against the latter’s -49 per cent. Debunking the expectations of Reits’ defensive play, the STI had a smaller negative return of 39 per cent during the same period.

Something that most analysts were able to agree on going forward was that Reits will have an easier ride on the credit front. ‘Indications from the various Reit managers indicate that borrowing margins continued to ease between 50 and 100 basis points,’ said CIMB-GK Research’s Janice Ding. The easing flow of credit will lay the groundwork for more acquisitions, most analysts reckon.

Ms Ding is favouring Parkway Life Reit and Frasers Centrepoint Trust as among the Reits making acquisitions within a 12-month period. OCBC’s Ms Kumar, who is neutral on the sector, has pegged Suntec, Mapletree Logistics Trust and Frasers Centrepoint Trust as ‘likely candidates for an equity/acquisition two-for-one in the next six months’.

All said, the remainder of the year promises to be a quiet one by CB Richard Ellis estimates. ‘Most S-Reits are unlikely to make many new acquisitions in 2009 as dividend yields have increased significantly and it would be extremely challenging to make purchases that are yield-enhancing,’ it said.