Testing Times For Singapore Reits

Source : The Business Times, March 21, 2008

AFTER several years of impressive achievement, Singapore’s real estate investment trust or Reit sector is clearly facing more testing times.

In theory at least, the defensive nature of Reits with their dividend yields should be good shelter for investors in the current volatile market. Instead, Singapore Reits have taken a beating. The FTSE ST Reit Index, which tracks Reits listed on the Singapore Exchange, has lost more than 10 per cent since it was launched early this year. A number of potential Reit listings have also been put on hold.

Key to the bearish sentiment are worries about the ability of Reits to secure funding in the future. Last week, Fitch Ratings warned that the global credit crunch sparked by US mortgage defaults may restrict the access of Singapore Reits to funding as well as reduce international investor interest in Singapore’s real estate sector. This may impact the ability of Singapore Reits to take advantage of any acquisition opportunity and will limit the number of any interested parties in any asset disposals.

And highlighting the pressure on the sector, Allco Commercial Real Estate Investment Trust (Allco Reit) this week tried - and failed - to obtain a court injunction to head off a downgrade by Moody’s which the Reit feared may undermine its fund-raising efforts.

But while the jitters are understandable and some of the concerns are clearly valid, the whole sector should not be tarred with the same brush. The Singapore Reit sector has grown to a stage where there is much variation within the theme. Obviously, there will be smaller Reits that will be hurt by the credit crunch. But there are also large Reits with strong parentage such as CapitaLand, the Keppel Group and Temasek Holdings which are unlikely to face a similar squeeze in funding and will be in a good position to capitalise on acquisition opportunities in current weak market conditions.

Even among the smaller Reits, there could be investment opportunities. Some of these - with smaller market capitalisation, fragmented shareholdings or shareholders who may be open to exiting their stakes - are potential targets and could benefit from takeover play. And the fact still stands that S-Reits offer average yields of 6.4 per cent, compared with 2.08 per cent for 10-year Singapore government bonds.

What is needed is probably a change in investor perception. The sector’s explosive pace in the early phase of expansion - Singapore has been rated as the best location in Asia-Pacific for Reits - has created high expectations among investors. Many have come to see Reits as growth stocks, not defensive plays. The current market uncertainties will inject a big dose of reality, which may not be a bad thing at all.