Category: KepREIT
REITs – UOBKH
Assessing Risk Of Inflation
Bond yields have risen in both the US and Singapore. In the US, yield for 10-year Treasury bonds has increased 71bp from 3.12% as at end-April to the current 3.83%. In Singapore, yield for 10-year government bonds has increased 52bp from 2.04% as at end-April to the current 2.56%.
Huge drop in commodity prices virtually eliminates inflation. The Consumer Price Index in the US and Singapore are both in negative territory, falling 0.7% in Apr 09. The US Producer Price Index was -11.6% while Singapore’s Manufactured Producer Price Index was -16.6% in April. Inflation at both consumers’ and producers’ levels is almost non-existent due to the huge drop in crude oil and other commodity prices on a yoy basis.
Expect inflation to be more severe in the US. A study of yield curves indicates that the market expects inflation in the US to intensify going forward. Yield curve based on US Treasury bonds steepened by 30-36bp in May 09 and by another 30-49bp in the first week of June. Yield curve based on Singapore government bonds steepened by 11-57bp in May 09 but eased off by 5-11bp in the first week of June. The behaviour of the yield curves, especially in the first week of June, indicates that investors are concerned that the US could experience higher inflation in the future due to monetary and quantitative easing.
Maintain OVERWEIGHT. Singapore is well protected by a strong Singapore dollar, which is supported by fiscal prudence. The Singapore dollar has strengthened 5.5% from S$1.52 to S$1.44/US$ so far in 2Q09.
Current yield spread is 3.60%, higher than historical average of 3.22%. We expect yield spread to contract further due to normalisation in the credit markets. Refinancing risk has abated with partial resumption of lending activities in the local banking industry. We prefer switching to laggard retail and industrial REITs. BUY Frasers Centrepoint Trust (BUY/S$0.945/Target: S$1.44) and Ascendas REIT (BUY/S$1.60/Target: S$1.93). Our only BUY call for office REITs is K-REIT Asia (BUY/S$1.08/Target: S$1.16).
Link – Table
KREIT – UOBKH
Lower Gearing, Higher Upside
We visited K-REIT Asia (K-REIT) and key highlights from the meeting are as follows:
Credit crunch has abated. Availability of funding via bank loans has improved significantly. There is a slight improvement in the credit spread that banks charge, although the quantum is not obvious in management’s opinion. Management sees an advantage in the longer tenures of 5-7 years provided by commercial mortgage-backed securities (CMBS). Cost of borrowings for long-dated CMBS is not as prohibitive, compared with bank loans, as the yield curve is not as steep. K-REIT has a S$190m CMBS that matures in May 2011.
Conservative in valuing assets. K-REIT revalues its investment properties once a year and the next valuation will be conducted in Dec 09. The company has been conservative in valuing its assets and usually marks prices to the lower end of the market range. It values Prudential Tower at S$2,066psf, Keppel & GE Towers at S$1,347psf, Bugis Junction Towers at S$1,265psf and One Raffles Quay at S$2,213psf. The risk of severe markdowns in asset values is quite low, especially given the recent rebound in transaction prices for strata office space.
K-REIT has the lowest gearing of 27.6% among office REITs (CapitaCommercial Trust: 30.7% post-rights issue, Suntec REIT: 34.4%). Financial risk is low as the next refinancing is an unsecured floating rate loan of S$391m from Keppel Corporation due Mar 2011. Maintain BUY with target price at S$1.16, based on a dividend discount model (required rate of return: 7.7%, growth: 2.5%).
Office REITs – UOBKH
Office REITs – Outstripping Improvement In Fundamentals
The Federal Reserve extended the TALF programme to commercial mortgage-backed securities (CMBS) starting 1 Jun 09, hence the optimism and rally for S-REITs. However, we believe the rally in the past two weeks for office REITs has already factored in the improvement in fundamentals.
Office rentals still falling but at a slower pace. Due to the ongoing financial crisis, rentals for prime office space corrected 6.8% in 4Q08 and 30.0% in 1Q09 to S$10.50psf pm after hitting a peak of S$16.10psf in 3Q08. The Raffles Place micromarket registered the steepest fall of 17.9% in 4Q08 and 28.5% in 1Q09 to S$10.50psf pm. Our survey of office REITs indicates that office rentals have fallen by a slower 5-10% so far in 2Q09 due to an improvement in market sentiment.
Deals starting to flow. There are more transactions in the secondary market for strata office space recently. Capital value for Suntec City Office Towers has rebounded 10.8% to S$1,781psf ytd. Capital value for International Plaza has similarly rebounded by 9.2% to S$1,100psf. Unlike in previous recessions, there has been no distress or fire sale in the office market during the current recession. As such, cap rates have been stable.
Revaluation results in higher gearing. We remain concerned about the correction in office rentals due to new supply coming on stream. A total of 8.3m sf of office space will be completed from 2Q09 to 2013, representing 11.5% of total stock. A markdown in the value of investment properties on revaluation will result in higher gearing and potential rights issues.
Maintain OVERWEIGHT for REITs. Current yield spread is 3.61%, higher than the historical average of 2.97%. We expect yield spread to contract further as credit markets normalise. Refinancing risk has abated with the potential reopening of the CMBS market. We prefer switching to laggard retail and industrial REITs. BUY Frasers Centrepoint Trust and Ascendas REIT. Our only BUY for office REITs is K-REIT Asia.
Link : Table
KREIT – Nomura
First look
KREIT reported its 1Q09 results after market close today – headline numbers were slightly ahead of the consensus full-year forecast but broadly in line with our fullyear estimates. Rents appear to be holding steady during the quarter, with a 5.9% sequential increase in the average portfolio gross rent to S$8.06psfpm. However, committed occupancy of the portfolio declined further to 95.8%, from 99.0% a quarter ago. BUY rating and price target of S$1.29 maintained.
Steady rents, sliding occupancy