SREITs – OCBC

Leveraging trend continues in 2011

Leveraging trend. In our year-end S-REITs strategy report in 2010, we highlighted that the trend of leveraging up among S-REITs is likely to continue into 2011, buoyed by the still-low interest rates environment. So far, this has proven to be true, with many S-REITs taking on more debt to fund new acquisitions. Recently, we have seen K-REIT entering into a S$125.1m sale and purchase agreement for Prudential Tower, which will increase its aggregate leverage from 37% to 39.3%. AAREIT has also leveraged up from 32.7% to 33.6% following its S$72m NorthTech acquisition. CACHE is also expected to bump up its gearing from 23.7% to 27.6% on the back of its maiden acquisition of two local logistics properties. CDLHT is also leveraging up from 20.4% to 26.5% with the purchase of Studio M Hotel for S$154m. We noted that most of these transactions to-date (except CDLHT) have been third-party acquisitions – we have yet to witness more sponsor-backed assets being injected into the REIT.

40% watermark increasingly tested. According to our estimates, the top three highest-geared S-REITs are Suntec (40.4%), K-REIT (39.3%) and FCOT (38%). Departing from the previous conservatism seen during the financial crisis, it seems that more S-REITs are now comfortable reverting back to the pre-crisis target gearing levels of 40-45%. We think the next likely candidates to gear up and possibly test the 40% watermark will be MIT, which has yet to make its maiden acquisition to-date; and FCT which is be looking at acquiring Bedok Point from its sponsor.

Sponsor Injections. Going into the remaining three quarters of 2011, we are awaiting more sponsor injections into the REITs, which will likely bring up gearing levels. Apart from Bedok Point, other FY11/FY12 targets on our radar screen include: ION Orchard (CMT), Ocean Financial Centre (K-REIT), Pandan Logistics Hub & CWT Logistics Hub 3 (CACHE), Pandai Hospitals in Malaysia (PLife REIT), 30 Tuas Ave 10 (Sabana), Changi City Point & Centrepoint (FCT), CMA’s China malls (CRCT) and Lippo-Karawaci’s Indonesian malls (LMIRT).

Interest rate hike likely in 2012. The MAS manages the Sing dollar’s strength by buying or selling currencies to keep its exchange rate against major currencies within a policy band. This FX-centred monetary policy regime means that Singapore has effectively imported US’s interest rate policy, despite obvious domestic inflationary pressures. Many economists are expecting the Fed to start normalising rates towards the latter part of 2012 – which, if correct, would imply the Sibor will stay at current low levels through 2011. We thus anticipate the leveraging trend among S-REITs to persist for the remaining of 2011 and possibly the early part of 2012.