Maybank selects YTL's Starhill Global REIT as top pick with 'BUY' recommendation & Target Price of SDG0.85

Maybank Singapore, January 14, 2013

By Analyst ONG Kian Lin

Year in Review. The S-REITs has been one of the best performers in 2012 (39% price return in FY12). Last year, we have seen many pension, insurance and income funds switching into REITs to pursue higher returns for the sheer fact that the yield-curve is almost flat. This is further aggravated by the almost “zero-bound yields” which meant that yields have no more room to fall, erasing any prospects of fixed income capital gains for investors. In the quest for returns, many such funds had to turn to slightly riskier asset classes such as REITs, Infrastructure Trusts and Master Limited Partnerships (MLPs) etc for stable recurring distributions.

S-REITs 2013 forecast. In the absence of real sustainable global economic growth, we believe that continuing rounds of QE Infinity, ECB’s unlimited bond-purchase program and BoJ’s yen-asset-purchase program will persist to keep interest rates low and liquidity high. This, in turn, will sustain property prices moving forward. Nonetheless, we DO NOT think that S-REITs will be able to repeat its stellar performance in 2012. In our view, S-REITs will find it challenging to complete yield-accretive acquisitions in 2013, given that property prices in most segments are already past their 2008 peak levels. We also see limited opportunities for further positive rental reversions (3-8% DPU upside per annum) as rentals face more downward pressure in 2013, following looming supply and softening of business sentiments.

Year of consolidation. 2013 is probably a year of consolidation for S-REITs, that will warrant further yield compression of at most 30-40bps, translating to a maximum of 6-8% upside. Given the high price-to-book of S-REITs (1.15x sector-wise), we downgrade S-REITs to NEUTRAL from OVERWEIGHT. For greater upside, we see more prevailing opportunities in developers (especially local high-end and diversified big caps) than landlords. We also see heightened risk of equity fund raising for S-REITs in asset enhancements, redevelopment projects or/and sponsor injections.

Stock picks. Selectively, our TOP picks remain with the more defensible Retail and Industrial REITs, namely YTL's Starhill Global (SGREIT SP, BUY, TP SDG0.85), Capitamall Trust (CT SP, BUY, TP SGD2.29) and Ascendas REIT (AREIT SP, BUY, TP SDG2.60), that can expect to benefit from near-term DPU upside with asset enhancements and ongoing redevelopment projects. We will advise investors to shun the more cyclical Office and Hospitality REITs.