Category: REIT
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.
SREITs – OCBC
Yield premiums are a short-term game
A yield premium story. The FTSE REIT Index is up 11.3% year-to-date and 145.8% from its Mar 2009 low. Market attention is on low base rates and the high liquidity environment. As a result, S-REIT distribution yields have tightened to about 6.6% on average (on consensus estimates) and to sub-5% in some cases. At the same time, price-to-book ratios have trended up to 0.97x book on average, and up to 1.50x book in some cases.
But will the benchmark hold out in the L/T? We typically pit S-REIT yields against long-term government bond yields to understand the risk premium awarded to REIT investors. Bond yields are currently at historical lows – making REITs look very attractive. But this benchmark may not hold out in the long run, in our opinion. First, long-term investors have to keep in mind that base rates will go up eventually. Second, if base rates are low for a sustained period (a weak economic environment, for instance) – this may actually be a signal that the distribution yields currently being offered are not sustainable and yield premiums will trend downwards eventually. In both scenarios, our argument is that artificially-low yield premiums are a short-term play, not a long-term fundamental reason to invest in REITs.
Don't ignore price-to-book. The market seems to be focusing on relative yields, to the point of ignoring what price-to-book valuations are saying. The case for a significant premium-tobook is questionable, in our opinion. A premium-to-book value signals either: 1) existing assets are undervalued and will rerate (a 50% re-rating looks aggressive to us, though); 2) there is potential to enhance values through asset works (true in specific cases); and 3) there is potential for inorganic growth through acquisitions. But we note that REITs that are already at their medium-term leverage targets are typically able to offer yield accretion of less than 10% given strong capital values and the need to finance acquisitions via both debt and equity.
Focus on the forgotten. Our preference, from the perspective of long-term investors, is to avoid the first-tier, large-cap REITs that are natural liquidity plays (and thus, a magnet for those playing the yield-premium game). Instead, we advocate investing in the so-called "forgotten", but still credible, REITs that are offering high absolute yields and are trading at decent discounts to book value compared to their peers. Reflecting this strategy, our top picks are Ascott Residence Trust [BUY, FV: S$1.33] and Starhill Global REIT [BUY, FV: S$0.65]. Maintain NEUTRAL on the broader sector.
REITs – OCBC
Bringing up to date, Maintain Neutral
Recovery Cycle: The Singapore REITs sector saw good growth in the first half of 2010. The total market capitalization of SREITs surged by 39% YoY to S$32b as of end Aug 2010. According to the recent CBRE “REITs Around Asia 1H10” report, Singapore REITs market capitalization also came in second highest in Asia; Japan was top at S$43b (US$32b). In addition, there was also a new S-REIT listing of Cache Logistics Trust in Apr, which was well-received by the investment community and raised gross proceeds of S$417.2m. Previously battered by the credit crunch, many were now able to ride on the sector’s recovery cycle. In fact, we see several S-REITs raising capital once more to acquire assets and grow.
Acquisitions-no more sleepy backwater: The 1H10 saw acquisitions activity by S-REITs rebound sharply with a total value of S$4b. The credit freeze that made financing almost impossible two years ago has also largely thawed. Borrowing costs for most S-REITs are now sloping downwards rather than upwards. YTD, we have seen public financing issuances and transacted private placements amounting to S$1.4b (Exhibit 2). Moving forward, we expect S-REITs to continue the refinancing process to take advantage of the easing credit market, the low interest rate environment, and opportunities to pacify investor jitters. Quality sponsors and quality assets will continue to be crucial to securing competitive pricing.
Regulatory risk-looming cloud on the horizon: The Singapore government remains highly active in the real estate space. The spate of property cooling measures announced recently for the residential market is a case in point. Of all the new measures, we see the move to disallow concurrent ownership of HDB flats and private residential properties within the MOP as the most significant. The market now expects private home prices and sales to be hit. Even though the indirect impact on the S-REITs sector remains to be seen, this episode certainly demonstrated the extent of government influence on the real estate sector.
Focusing on value. Despite the still uncertain market conditions, the FTSE REIT sub-index is, in fact, up 5.85% YTD. This means that valuations for several S-REITs, especially the larger cap plays, are trading at significant premium to book value. But coupled with the risk of falling asset prices should the government decide to get tough on the nonresidential property market, we believe that these S-REITs are increasingly looking fairly priced. As such, we maintain a NEUTRAL view on the sector.
REITs – BT
Asia Reit market cap up by a quarter
(HONG KONG) Asia’s total market capitalisation for real estate investment trusts (Reits) rose by a quarter in the first six months to US$69 billion, global property services firm CB Richard Ellis said yesterday.
However, the weighted average dividend yield for Asian Reits contracted to 6.86 per cent in the first half of 2010 from 8.06 per cent during the same period last year, US-based CBRE said in a statement.
‘The fortunes of Asian Reits still remained mixed. During the first half of the year, some markets have seen strong growth in IPO and acquisition activity and others have witnessed delisting applications, mergers and consolidations,’ said Andrew Ness, executive director at CBRE Research Asia.
‘Reits in Japan, Taiwan, Korea and Hong Kong outperformed their respective stock markets, all of which suffered downward adjustments in the second quarter amid concerns over the pace of the global economic recovery,’ Mr Ness added.
Acquisitions in the market totalled US$5.7 billion during the first half of 2010, surpassing the US$4.2 billion recorded for the whole of 2009, with Japan being the most active market for asset purchases, CBRE said.
Singaporean and Malaysian Reits were active buyers of office, retail, industrial and healthcare assets while Reits in Hong Kong, Taiwan, South Korea and Thailand remained inactive, it said.
While a few Reits were delisted, South Korea, Singapore and Thailand saw new listings, such as Cache Logistics.
Reits invest in mainly commercial property and pay rent collected from their properties to shareholders as a dividend and also usually offer returns that are higher than yields of government bonds. — Reuters
REITs – BT
Mapletree to float after listing 2 Reits
Trusts with combined assets of $5-6b to list by next year and set stage for Mapletree’s own flotation
Mapletree Investments, a fully-owned real estate subsidiary of Temasek Holdings, yesterday announced plans to list two trusts that will hold a total of about $5-6 billion of Singapore assets between them. One of the flotations is targeted by year-end.
In addition, the group plans to set up another three private equity funds over the next 12 months.
Once the two real estate investment trusts (Reits) have been listed on the Singapore bourse, the company’s business profile and performance track record will be strengthened and Mapletree itself could be floated, although this may be two years from now, Mapletree’s group CEO Hiew Yoon Khong said at a media briefing yesterday.
‘If you look at the pure qualification of listing, we can go (for a listing) any time. But when we go to the market, we want the market to be quite clear that we are quite a unique real estate company,’ he added.
‘The IPO will not be driven by the usual fund raising objective but it will help us in terms of improving our footprint, branding and engagement in the market place.’
He also said Mapletree plans to double total assets under management from $12.9 billion currently to $25 billion in five years, with growth driven by third-party assets under management.
The group is targeting to list a Reit by the end of this year that will hold about $2 billion worth of Singapore industrial properties, subject to conducive stock market conditions.
Bankers have already been appointed to work on the IPO; they are believed to include Goldman Sachs, Citigroup and DBS.
The second Reit that Mapletree is working hard to mint will hold about $3-4 billion of Singapore commercial properties – anchored by Vivocity mall, and possibly including Merrill Lynch HarbourFront, PSA Building and Mapletree Business City (MBC).
However, the precise portfolio composition of this second Reit has not been determined as some assets were completed recently and may need more time for their income to stabilise.
Mapletree plans to be able to do an IPO for this commercial Reit, to be called Mapletree Commercial Trust, by year-end, although this may stretch to next year.
The first Reit will hold the former JTC industrial portfolio worth $1.73 billion currently held under Mapletree Industrial Trust (MIT) as well as possibly other Singapore assets held under Mapletree Industrial Fund (MIF), subject to approval of MIF and MIT investors.
The proposed Reit is likely to be geared at 30-35 per cent. Mapletree expects to retain a stake of about 30 per cent in the trust post-flotation, suggesting an IPO size of close to $1 billion, said Mapletree’s CEO (industrial) Phua Kok Kim.
MIT’s portfolio is currently syariah compliant and if Mapletree chooses to have the proposed Reit syariah compliant as well, it will open up a demand pool from Middle East investors, Mapletree executives said.
The three private equity funds which the group hopes to spin off in the next 12 months will include a second China-focused fund to undertake new commercial and residential projects once the existing Mapletree India China Fund is fully committed for its China allocation, says Mapletree Investment’s chief investment officer Chua Tiow Chye.
There are also plans for a Vietnam fund for which Mapletree has already identified a pipeline of commercial and residential projects to seed the proposed fund.
The third new fund will be a Japan-focused one that will invest in the IT-related business space – for which the group bought a light industrial building in Tokyo this year as a seed investment.
Later down the road, Mapletree is also planning a China-focused industrial fund.
Currently the group manages the Mapletree Logistics Trust and co-manages the Lippo-Mapletree Indonesia Retail Trust.
It also manages four private equity funds, including one jointly with CIMB in Malaysia.