SREITs – DMG

Low interest environment supportive of SREITs

Low interest rate environment will support SREITs prices in 2011. Interest in SREITs have stemmed from the above average yield spreads, a result of 10-yr government bond yields dipping to as low as 1.9% in Aug 2010. (Although yields have since risen to 2.7% at end 2010, current yield spreads are wider than pre-crisis). The low interest rate environment is expected to persist, going into 2011, and hence we expect prices to be supported as investors continue to pursue yields. Investors are also likely to be attracted to assets that offer an inflation hedge by allowing for continuous re-pricing of cash flows with a dynamic earnings model.

Tourism to be pillar of economic growth in 2011. Casino revenues are expected to almost double to reach US$5.5b in 2011, their first full year of operations. Tourist arrivals are expected to chalk up another 10% increase in 2011, with the continuing draw of the casinos as well as the reopening of the Battlestar Galatica ride at Universal Studios Singapore and launch of other key attractions. Corporate travel and meetings are also expected to ramp up, in view of improved economic conditions. MICE events are expected to become increasingly Asia-centric and Singapore is well positioned to become a regional MICE hub. MICE players including the integrated resorts have reported 20% increase in event sales in 2010 and a strong pipeline of events till 2012. We thus expect hospitality counters, such as CDLHT (BUY/TP: S$2.39) to benefit from the influx of visitors, given its portfolio of hotels are well-located near the CBD and IRs.

Strong recovery in prime office rents. Office rents are chalking up increasing rates of growth, since turning the corner in 2Q2010. Prime rents are reported to have hit S$9.35 in 4Q, a 7.5% increase QoQ. Concerns about large volumes of shadow space coming on-stream when tenants vacate to move into new schemes have dissipated, on the back of brisk leasing activities. Suntec (BUY/TP:S$1.71) has reported strong increases in its Suntec City office occupancy, reaching 98.1% in 3Q2010 while CCT (NEUTRAL) is confident that take up would come from both existing tenants expanding and newcomers. With economic growth expected to continue going into 2011 and Singapore’s raised profile as a financial centre and gateway to the rest of Asia, office rents are expected to be on a strong uptrend and Suntec is well poised to benefit from the acquisition of MBFC Phase 1.

Retail and Industrial rents will see marginal increase. Outlook for both retail and industrial sector has improved in tandem with the economy, though reined in by the potential huge supply. We expect Orchard Road rents to start making marginal increases in 2011, as demand catches up with the large supply added in 2009 and 2010, while Suburban mall rents will continue to be supported by strong wage growth, albeit tempered by 2.1m sq ft new supply coming on-line. In 2011, 16.4m sq ft of industrial space is expected to come on-stream, compare to the pre-crisis demand of 16m sq ft, implying marginal rent increases at best.