In a research report dated 10 December 2010, OCBC Research writes most of the Singapore real estate investment trusts (S-Reits) emerging stronger from the financial crisis, with healthier balance sheets, forthcoming acquisition proposals and more asset enhancement works.
Three Reits listed on (SGX) this year, Cache Logistics Trust, Mapletree Industrial Trust (MIT) and Sabana Reit. This was in stark contrast to a year ago when most of the S-Reits were burdened with deleveraging plans, decompressing cap rates and asset sales.
The FTSE Reit sub-index is up 15.9 per cent year-to-date. It has since recovered 145.1 per cent from its trough during the financial crisis in March 2009 and is 38.2 per cent shy of its peak in June 2007.
If we use 2006 levels as a benchmark, the FTSE Reit sub-index still has 25 per cent of headroom before reaching the 2006 summit, and it is only 9.2 per cent above of its 2006 nadir.
Stepping into 2011, we think there is still upside potential for the index to reach 2006 levels, and this recovery momentum is already playing out nicely among some of the S-Reits.
Despite being touted largely as defensive yield plays, we have witnessed some S-Reits (such as CapitaCommercial Trust, K-Reit Asia, Fortune Reit and ParkwayLife Reit) appreciating more than 25 per cent year-to-date.
Going into 2011, we upgrade our rating for the S-Reits from ‘neutral’ to ‘overweight’.
The persistently low interest rate environment is expected to stimulate the property market and continue to drive prices higher.
Together with ‘hot capital inflows’ pouring into Asia, it is likely that spot rental rates and asset prices will continue to be inflated.
At the same time, many Reit managers are capitalising on the recovery cycle for further asset enhancements initiatives and acquisitions.
Being an inflation hedge, we think investors’ interest in S-Reits is likely to remain piqued in 2011.
However, we noted that different sectors may experience different rates of recovery.
In our opinion, the recovery is likely to be more pronounced for the office sector, followed by the industrial sector as the catch-up potential is greatest for these two sectors.
The retail sector is likely to remain subdued with moderate rental escalation, new retail supply with additional 612,000 square feet of leaseable retail space in 2011, and lessened spending power from foreign visitors affected by the appreciating Singapore dollar.
Within our coverage universe, our preferred picks for large-caps are Mapletree Logistics Trust (‘buy’, fair value: $1.00), Ascott Residence Trust (‘buy’, fair value: $1.38) and for small-caps, Frasers Commercial Trust (‘buy’, fair value: $0.18), Starhill Global ( ‘buy’, fair value: $0.66).