SREITs – MS

Growth Challenging; Yields To Support

Investment Conclusion: Post the recent S-reits’ results, we maintain our In-Line industry view as we believe valuations look fair. Upside from inorganic growth appears challenging as capital values seem to have bottomed and sellers are pricing forward asking prices. Rental reversions in 2011 are likely to be flat/negative as rents from peak 2008 roll-over, but this is already reflected in the share prices, in our opinion. Average yields of 6.0% look attractive vs. the current savings rate of ~0.25% and current MAS S$ 10yr bond yields of 2.0%, especially if expectations for long-term yields stay low. In a range-bound market, we believe investors may be content to collect dividends that look well supported. Strong demand for S$ bond issuance in 2010 suggests to us that the demand for yield-like products could be increasing, a positive for S-reits.

Difficult to grow via acquisitions: How things have changed. At almost every results briefing we attended, inorganic growth was a major focus of attention; especially with low gearing and balance sheets repaired. While it is generally positive for an S-reit to make an acquisition, we do not support an acquisition-at-any-cost philosophy. Acquisitions in Singapore will be difficult given the lack of quality assets and sellers’ increasingly optimistic outlook that is translating into higher asking prices, while the success of overseas acquisitions remains to be seen. A dogged focus on inorganic growth is likely to disappoint, but we think the focus should be on the stability of underlying portfolios’ and organic growth prospects that are looking up as the rental cycle bottoms.

CCT our preferred pick: With acquisitions challenging and rates likely to stay low, we prefer S-reits with higher dividend yields, or with specific pipelines of assets to acquire. Our top pick remains CCT, followed by Suntec REIT. Our least preferred S-reit is CMT. We like CCT for trough yields of 5.2% (FY11e) that may surprise on the upside if the rental cycle turns faster than expected.