REITs – OSK DMG

Rising Risks But Slower Growth

In 1Q13, the FSTREI performed slightly better than STI, with a YTD appreciation of +12% vs the latter +7.5%. During this period, the low interest rate and high liquidity environment have prompted investors to continue their chase for yield plays. In this report, apart from providing a recap and an outlook on the sector, we also examine the effects in the event if any/all the three main drivers of the S-REITs sector changes.

Stable results – grew through AEIs and acquisitions. The latest SREITs results posted market cap weighted average growth of +3.5% y-o-y and +1.4% q-o-q in DPU for the sector. Among the 23 REITs (excluding MAGIC) listed in Singapore, only four REITs reported a lower y-o-y DPU. Among the REITs that recorded a positive growth in earnings, 61.1% of them grew as a result of AEIs (16.7%) and new acquisitions (44.4%).This is inline with our earlier view that most REITs will focus on growing their earnings inorganically, on the back of a low interest rate and high liquidity environment.

Flattish outlook in the various subsectors of SREITs. Although the rental market continues to be well-supported by the various industries, the outlook for possible positive reversion appears dampen in the industrial, hospitality and retail market as the global economy remains uncertain. Coupled with ample supply of commercial buildings over the next two years, we retained a flattish outlook on these sub-sectors. However, in a mid-term timeframe, we remain positive on the outlook of the Grade-A office sector in Singapore as demand remains limited coupled with an expected uplift in rental rates as the economy recovers.

Risk in the SREITs sector increases. Although we do not expect the i) global outlook, ii) high liquidity and iii) prolonged low interest rate environment to change in the near term, a closer examination indicated that if any of these factors are to change, it could potentially result in a sell-down in SREITs. In our view, given the high sector valuations, the risk-reward profile is less sanguine than before. We, therefore, introduce a new return gearing metric that takes these factors into account to study the relationship between share price, risk and return.

Maintain NEUTRAL on rich valuations; positive bias remains. On the back of i) flattish outlook in the various SREITs subsectors; ii) high valuations of S-REITs; iii) lack of growth catalysts in the near term; and iv) rising risks in the SREITs sector, we maintain our NEUTRAL view in the SREITs sector. However, positive bias remains if more liquidity flows into the market due to the latest QE program from Japan.