Reits A Safe Choice In Roily Market: Goldman

Source : The Business Times, August 25, 2007

SINGAPORE'S real estate investment trust (S-Reit) market could be just the place to park your funds while weathering the storm in the equity markets, says Goldman Sachs executive director (Asia-Pacific Investment Research) Leslie Yee.

In a report on S-Reits, Mr Yee said: 'We reiterate our positive view on S-Reits and recommend investors to buy in the prevailing choppy equity markets.'

S-Reits were sold down recently but Mr Yee believes the market is 'under-appreciating the defensive qualities and overstating risks'.

Goldman Sachs highlighted four attributes that make Reits 'defensive'. These are: low gearing, typically about 40 per cent; income payout which is often 100 per cent; secured leases, usually for three years; and limited development risk.

The report said that the current market volatility will affect the near-term ability of Reits to access capital market funding, but Goldman Sachs believes Reits have the necessary debt capacity and expect that equity markets will be willing to fund good acquisitions.

Goldman Sachs S-Reit Index has fallen by 11.8 per cent since July, which is slightly less than the decline in the Singapore property stock index of 15.3 per cent.

It has also lowered its target price for the nine S-Reits it covers by 0.5-10 per cent. Based on revised target prices, these S-Reits offer an upside of 7-37 per cent.

In particular, Goldman Sachs has added CapitaMall Trust to its 'Conviction Buy' list. It has upgraded Suntec Reit to 'Buy' from 'Neutral', and reiterates 'Buy' on K-Reit.

Goldman Sachs also likes sponsored Reits. And it does not matter if a Reit does not pay top dollar for a sponsor's asset. 'Our analysis on the sale of a completed asset shows the net benefit to a developer is roughly the same from selling to a Reit or from selling to a third party at a price that is nearly 20 per cent more,' explained Mr Yee.

He said: 'We see the current market providing a good entry point into Reits', noting the sector leader's - CapitaMall Trust - pull-back of 20 per cent from its share price two months ago.

In the near term, it does see cost of funding for acquisitions like the one-third stakes in One Raffles Quay by K-Reit and Suntec-Reit as a major risk.

But in the long term, it sees potential for growth through acquisition and argues that 'win-wins' can be created when a developer sponsor sells assets to Reits.

Goldman Sachs launched its Reit coverage in January when it also forecast the nine S-Reits would make $15 billion in acquisitions within a three-year period, boosting portfolio sizes by 75 per cent.

Based on announced acquisitions to date, the nine Reits have made $3.9 billion worth of acquisitions, which is 27 per cent of the target.