• S-REITs have rebounded by 56% from March low, in line with 60% for the STI. The S-REIT sector has rebounded strongly from its all-time low in Mar 09, attributed to a strong inflow of foreign funds. Correspondingly, yield expectations have abated from an all-time high of 17% to 11%.

• Recapitalised; refinancing concerns largely averted. REITs have gone beyond the successful refinancing of debt to recapitalisations in a bid to strengthen their balance sheets for the recession ahead. Sponsor-backed REITs including Ascendas REIT, CapitaMall Trust, CapitaCommercial Trust, Starhill Global, and Frasers Commercial Trust went to the market and raised a combined S$3bn of equity. Average asset leverage for REITs under our coverage has retreated to 32% from 35%. Interest cover also appears healthy at 4.5x vs. the typical lenders’ requirement of 2x. We consider balance sheets to be relatively healthy.

• Positioned for a recovery. The larger environment looks positive for investing in REITs, underpinned by: 1) expected high liquidity and low interest rates; and 2)the Singapore government’s continued support for the REIT industry.

• We are most optimistic on hospitality and retail sub-sectors, which we believe will be major beneficiaries of the following in 2010: 1) the completion of the two integrated resorts (IRs); 2) a change in the marketing of Singapore as a standalone destination for tourists; 3) an expanded transport infrastructure with more rail lines; and 4) the anticipated return of corporates and expatriates as Singapore grows more cost-competitive against its regional peers.

• Neutral on industrial sub-sector. The outlook for both the manufacturing and logistics industries remains weak, and we expect the businesses of industrialists in factory and warehouse space to be under pressure. We expect occupancy for industrial space to lag behind the actual slowdown in industrial businesses, holding out the downturn for industrial properties for longer.

• Negative on office sector. We expect occupancy to hold up with the return of corporates as Singapore grows more cost-competitive vis-à-vis the region. However, rents are expected to remain under pressure from three continuous years of strong potential supply and shadow space.

• Overweight on S-REITs; top picks are Suntec REIT and CDLH-HT. We retain our Overweight position on REITs. Our top picks are CDL-HT and Suntec REIT on the back of their lower valuations and near-term catalysts. Dividend yields are also attractive at 9% and 10% respectively. CDL-HT’s Singapore concentration makes it the best proxy for a tourism revival in Singapore. Suntec REIT’s Suntec City Developments (87% of gross revenue) is the closest sizeable retail cluster to the Marina Bay Sands IR and one of the major beneficiaries of two MRT stations opening next to it. We also have Outperform ratings for FCT, ART, PLife, and CREIT.

Link – Table