CIMB on Reits

CIMB loves them based on a research note dated Aug 18 2011 where it called for an “Overweight” on the Reit sector.

CIMB recently hosted nine Singapore and Malaysia real estate investment trusts (Reits) at our inaugural Asean Reit conference. While investors were generally not pricing in a double dip, most appeared increasingly cautious.

Coupled with value emerging from the recent selldown, we sensed increased interest in Reits, with a particular preference for those in more resilient segments like industrial, retail and healthcare.

Our top picks are Ascendas Reit, Frasers Commercial Trust, Starhill Global Reit and Cache Logistics Trust. We also like CapitaMall Trust and CDL Hospitality Trust at current valuations.

During the conference, we sensed increased caution among investors after the recent market selldown, with more turning to S-Reits given increased risk aversion. Most Reits also gave the feedback that they had been receiving more investor interest and enquiries. While turning cautious, investors were not yet pricing in a double dip.

Questions centred on rental growth and expansion via acquisitions or development. Most agreed with us that S-Reits have emerged with stronger balance sheets and portfolios from the last crisis.

Recent market volatilities and developments in advanced economies have not affected Reits yet.

Notwithstanding slowing growth in advanced economies, industry participants remained positive on growth in the region. However, most would be monitoring developments closely.

Industrial Reits continued to expect positive rental reversions on the back of rising spot rentals and rental step-ups. Investors liked the stability from industrial leases but were slightly wary of a seeming slowdown in manufacturing in Singapore.

Industrial S-Reits, however, noted that manufacturing remains a core component of Singapore’s economy and continued to see bright spots as local manufacturing transitions to higher-value-added products and services.

While spot rents for most office S-Reits remained healthy, more investors were starting to question rental growth next year. We noted a moderation in tone among the office S-Reits, on the back of a slowing leasing momentum, significant physical completions in 2012 and potential growth concerns. Most expected rental growth to be more moderate in 1H12, before picking up again in 2H12 as supply tightens in 2013.

Most Reits are still keen to grow through acquisitions. Opportunities are, however, limited with the system still flush with liquidity.

Industrial Reits noted a difficult acquisition environment, given increased competition from new entrants such as private funds, smaller players and other industrial Reits. Most were thus gravitating towards development (mainly build-to-suit) and redevelopment, given their enhanced yields, the small capital outlays, short gestation periods and Reits’ ability to mitigate leasing risks by building to suit.

Similar concerns on compressed yields and a lack of quality assets for acquisition were expressed by the office S-Reits.