Month: June 2008
SREIT – UOBKH
Relative attractiveness of REITs affected by spike in bond yield
Long-term government bond yield on the rise. Benchmark 10-year Singapore government bond yield has spiked up from 2.4% to 3.4% last week. We believe this is a knee jerk reaction to the near collapse of the bond market in Vietnam. The worldwide trend of higher commodity prices and sustained inflation is likely to have contributed as well. The increase in Singapore’s CPI from 6.7% in Mar 08 to 7.5% in Apr 08 has reignited fear of runaway inflation.
Short-term interest rates remain unchanged. Fortunately, three-month SIBOR has remained stable at 1.1875%, suggesting ample liquidity in the banking system. This means that Singapore REITs are not affected as most bank borrowings are priced off SIBOR. Singapore REITs has been able to secure loan facilities and issue medium term notes with tenure of two to three years at competitive interest rates. Longer term funding has so far been secured mainly through issue of convertible bonds. The steepened yield curve does pose some challenges as it hampers efforts to secure longer term funding.
Big is beautiful. We remain positive on Singapore REITs with economies of scale, such as CapitaCommercial Trust (office), CapitaMall Trust (retail) and Ascendas REIT (industrial). On average, Singapore REITs provides distribution yield of 5.5%, which is fairly attractive. The strong S$ provides some cushion again inflation. Also, Singapore is drastically different compared to Vietnam, an emerging economy that has just opened itself to foreign investment. Vietnam’s bond and equity markets are relatively small and undeveloped compared to other countries in the region.
We have, however, adjusted our target prices for Singapore REITs to factor in a higher risk-free rate of 2.50% vs previous 2.35%. We will make further adjustments depending on how the financial system responds to higher commodity prices and inflation. Our preferred BUYs for Singapore REITs are Ascendas REIT, CapitaCommercial Trust and Suntec REIT.
Link – Yield Table
CMT – UOBKH
Better Value After Share Price Correction
CapitaMall Trust (CMT) has corrected by 7.4% the two days after we downgraded our recommendation from BUY to HOLD. The correction has brought valuation to a more realistic level.
Value creation through asset enhancement initiative. CMT is expected to complete the acquisition of The Atrium in Aug 08. The Atrium will be amalgamated with Plaza Singapura to create an integrated development with 170m of prime retail frontage along Orchard Road and net lettable area (NLA) of over 900,000sf. State land between the two buildings will be covered by shelters to create an open plaza. The asset enhancement initiative (AEI) will also improve traffic flows from the Dhoby Ghaut MRT station.
About 100,000sf of prime retail NLA on Levels 1 and 2 of The Atrium will be created by decanting lower-yielding spaces. Management plans to use some of the additional retail space for duplex flagship stores fronting Orchard Road. Renovation works will be carried out in phases from 2009 to 2010. We have estimated construction cost at S$400psf and have factored in contribution from the new retail space starting 3Q10.
Upgrade to BUY. CMT owns and operates 13 retail malls strategically located in suburban areas and downtown core. It is the largest retail REIT in Singapore with a market share of 13% for private retail stock. CMT has revised its local target asset size from S$8b to S$9b by 2010. We have raised our target price from S$3.72 to S$3.76 after factoring in contribution from 100,000sf of retail space at The Atrium converted from office space starting 3Q10. Upgraded from HOLD to BUY as the stock provides upside of 13.6%.