REITs – OCBC

Bringing up to date, Maintain Neutral

Recovery Cycle: The Singapore REITs sector saw good growth in the first half of 2010. The total market capitalization of SREITs surged by 39% YoY to S$32b as of end Aug 2010. According to the recent CBRE “REITs Around Asia 1H10” report, Singapore REITs market capitalization also came in second highest in Asia; Japan was top at S$43b (US$32b). In addition, there was also a new S-REIT listing of Cache Logistics Trust in Apr, which was well-received by the investment community and raised gross proceeds of S$417.2m. Previously battered by the credit crunch, many were now able to ride on the sector’s recovery cycle. In fact, we see several S-REITs raising capital once more to acquire assets and grow.

Acquisitions-no more sleepy backwater: The 1H10 saw acquisitions activity by S-REITs rebound sharply with a total value of S$4b. The credit freeze that made financing almost impossible two years ago has also largely thawed. Borrowing costs for most S-REITs are now sloping downwards rather than upwards. YTD, we have seen public financing issuances and transacted private placements amounting to S$1.4b (Exhibit 2). Moving forward, we expect S-REITs to continue the refinancing process to take advantage of the easing credit market, the low interest rate environment, and opportunities to pacify investor jitters. Quality sponsors and quality assets will continue to be crucial to securing competitive pricing.

Regulatory risk-looming cloud on the horizon: The Singapore government remains highly active in the real estate space. The spate of property cooling measures announced recently for the residential market is a case in point. Of all the new measures, we see the move to disallow concurrent ownership of HDB flats and private residential properties within the MOP as the most significant. The market now expects private home prices and sales to be hit. Even though the indirect impact on the S-REITs sector remains to be seen, this episode certainly demonstrated the extent of government influence on the real estate sector.

Focusing on value. Despite the still uncertain market conditions, the FTSE REIT sub-index is, in fact, up 5.85% YTD. This means that valuations for several S-REITs, especially the larger cap plays, are trading at significant premium to book value. But coupled with the risk of falling asset prices should the government decide to get tough on the nonresidential property market, we believe that these S-REITs are increasingly looking fairly priced. As such, we maintain a NEUTRAL view on the sector.