Analysts Still Upbeat On Reits But Investors Wary

Source : The Business Times, March 19, 2008

FOR some time now, analysts have been saying that realestate investment trusts (Reits) are a good shelter in stormy markets, given their attractive and steady yields. But investors are still not biting, as concerns remain about Reits’ ability to raise capital or refinance debt.

The FTSE ST Reit Index closed yesterday at 735.96, about 13 per cent down since the index was launched on Jan 10. It has slumped this month since hitting 798.91 on Mar 4.

Even so, analysts have continued to issue positive calls. In a report released on Monday, DMG & Partners said Singapore Reits (S-Reits) were good value given the widening yield spread against the 10-year SGS (Singapore Government Securities) bond. S-Reits offer on average yields of 6.4 per cent, compared with 2.08 per cent for 10-year bonds, the report said.

An earlier report by Goldman Sachs also put an ‘overweight’ call on the sector. Analyst Leslie Yee said that mergers and acquisitions are likely to be positive for Reits. Large Reits will have another avenue for growth, and investors in those Reits bought out can cash in on premiums paid for an acquisition.

And last Friday, Credit Suisse initiated coverage on three retail Reits, saying that growth in that sector will be supported by strong consumption expenditure and buoyant tourism. ‘Central retail supply can be readily absorbed while suburban supply is not excessive,’ Credit Suisse said.

But Reit share prices suggest that investors are still skittish. DMG analyst Terence Wong said: ‘Right now cash is king. In a bear-like situation, it’s not unusual that people are selling everything they can,’ he said. ‘But our calls are mid to long term.’

Although their reports were generally upbeat, analysts said that worries remain. Despite falling Sibor (Singapore interbank offered rates), corporate spreads are widening, making it more difficult for Reits to fund expansion by issuing debt, or to refinance existing debt. Allco Reit was downgraded yesterday by Moody’s to Ba2 from Ba1, following an earlier cut in January from Baa3.

Credit Suisse acknowledged in its report that ‘Reits have not been defensive, as investors have previously factored in exuberant growth expectations that were disappointed by slowing acquisition growth. The consequent high required yields are a paradox of their own’.

The house said it preferred domestically focused plays with large market caps, strong sponsors, high asset quality and low gearing. It has ‘outperform’ calls on CapitaMall Trust and Frasers Centrepoint Trust and is ‘neutral’ on Macquarie MEAG Prime Reit (MMP Reit).

Kim Eng Research in a report earlier this month noted that investors seem happy to stomach premium valuations for domestic-focused Reits that focus on retail and office space like Frasers Centrepoint, CapitaCommercial and CapitaMall.

DMG’s report recommended Suntec Reit, Frasers Centrepoint Trust and Cambridge Industrial Trust. ‘We would prefer to go for low-geared Reits (20 per cent to 50 per cent) which have lower holding costs and are more able to wait for credit markets to improve.’