REITs – UOBKH

Mixed Performances In Turbulent Times

Growth was 1H07 theme. For the most part of this year, growth has been the main theme of the real estate investment trust (REIT) sector. The best-performing REITs for 1H07 were high-growth REITs such as CapitaRetail China Trust (CRCT), Capital Mall Trust (CMT) and CDL Hospitality Trust which saw returns in excess of 40%. As the market has turned cautious with the bottoming out of interest rates in April and May, most REITs have fallen from their highs in May and June. The recent correction has resulted in the decline of most REITs.

Boring REITs offer capital protection. In turbulent times, the market’s appetite for risk falls sharply and risk premiums shoot up. The focus then shifts from growth to capital protection and income preservation. Investors should consider boring REITs. Though less exciting, they have the lowest growth premiums built into their stock prices. We look for REITs with low price-to-book values for capital protection and high-yield REITs for income preservation. In addition, we prefer REITs with a greater focus on the Singapore economy given the latter’s safe haven status. ParkwayLife REIT (Parkway) and Macquarie MEAG Prime REIT (MMP) stand out in terms of yields and price-to-book ratios.

Avoiding logistic REITs for the time being. With slower asset appreciation and rental reversion, REITs focusing on the logistics segment rely on acquisitions to drive growth. As risk premiums go up, the increase in cost of capital makes it more expensive to fund new acquisitions on yield-enhancing terms.

Buying opportunities for the brave. The current market turbulence may represent an opportunity to pick up some high-quality REITs at depressed prices. For the bottom-fishing investor, we recommend CapitaCommercial Trust (CCT), K-REIT Asia (K-REIT), CRCT and CMT for their ability to grow organically and via acquisitions. As the market recovers, these higher-quality REITs are likely to be the first to stage a rebound. As seen in the market rebound this week, these REITs had the bigger price appreciation.