SREIT – Goldman Sachs

Strong Singapore; initiate coverage of 3 REITs, raise CDLHT to Buy

Looking beyond equity offering indigestion
We think a spate of equity offerings plus expectations of more to come in the Singapore REIT space has caused share prices to retreat. As it has become more expensive for REITs to issue equity, we are reducing our projections of contributions from potential acquisitions. But we note that rents across property segments remain strong and are raising our growth projections for hotels. We think SREITs still offer a compelling proposition of defensive characteristics overlaid with growth, organic and through acquisitions.

Focus on Singapore hotels and retail reits
While equity markets are choppy and sentiment in the Singapore residential market has been dampened by withdrawal of the deferred payment scheme, we believe the strong Singapore structural story remains intact. We like organic growth prospects for office, retail and hotel properties. We favor 1) hotels, given strong near- and longer-term prospects we see; and 2) retail, which we view as underappreciated and where rental growth could surprise on the upside. We like acquisition growth prospects of overseas REITs CRCT and AiTrust, but we think much is priced in and favor Singapore-centric REITs.

Initiating three new REITs, upgrading CDLHT to Buy
We initiate on CapitaRetail China Trust (Sell, TP S$2.18); Ascendas India Trust (Neutral, TP S$1.66); and Macquarie Prime REIT (Neutral, TP S$1.24). We upgrade CDLHT to Buy from Neutral on higher FY08/09 RevPAR yoy growth assumptions. We like CDLHT’s leverage to rising Singapore hotel room rates and potential for acquisition growth regionally and in Singapore, where sponsor City Developments has a pipeline of over 1,800 rooms. We are transferring coverage of AREIT, MLT, CDLHT, and ART from Leslie Yee to Paul Lian.

Adjusting target prices for REITs under coverage; focus on quality
We adjust 12-mo. TPs for 9 currently covered REITs by -8% and +20%. We reiterate our Buys on CMT, Suntec, and K-REIT. CMT and Suntec are exposed to Singapore retail and have size and liquidity, which we like in a flight-to-quality environment. Given the rising number of small-cap REITs of varying quality, we would focus on larger REITs with quality assets, good track records, and strong management. Risks: A fall in business and consumer confidence may impact rental reversions.