Singapore Reits display holding power with strong results

The Straits Times, May 10, 2014

SINGAPORE real estate investment trusts (Reits) have been surprisingly resilient this earnings season, despite taking a hit last year as tapering fears and a series of property cooling measures set in.


Analysts say a number of Reits, particularly those with growing exposure in China and Australia, have delivered strong results in recent weeks. Acquisitions, asset enhancement initiatives, improved portfolio occupancy rates and positive rental reversions, or increased rents upon lease renewal, have also helped boost several Reits.


Looking ahead, some analysts caution that the progressive reduction in bond purchases by the US Federal Reserve may lead to a rise in bond yields. This could result in a narrowing of the yield spread and reduce the attractiveness of local Reits versus other yield plays. Also, a rise in interest rates would lead to higher funding costs for Reits looking to refinance their existing debt or acquire new assets.


"Together with the fact that several... S-Reits have enjoyed a good run-up in unit prices recently, we are retaining our selective stance. We continue to prefer S-Reits with clear growth drivers, strong financial positions and compelling valuations," Mr Kevin Tan of OCBC Investment Research said.


Generally seen as defensive, Reits are popular as they can offer higher yields than regular property stocks through tax-exempt dividends and a requirement to distribute at least 90 per cent of taxable net income to unitholders.


The 26 Reits listed here averaged a year-to-date total return gain of 7.7 per cent, while indicative dividend yields averaged 6.4 per cent, according to a report by SGX My Gateway. They are distributing almost $3 billion in dividends to unitholders on annual basis.


Taking the sector as a whole, the FTSE ST Reits Index had total returns of 5.79 per cent to date this year. The Reits index tracks a portfolio of 31 SGX-listed Reits and property trusts under the Industry Classification Benchmark. It also outpaced the Straits Times Index, which is up 2.67 per cent this year at 3,252.13 yesterday.


Ascendas Reit is among the major outperformers. Its fourth- quarter distributable income surged 23.9 per cent to $85.3 million due in part to income relating to its Z-Link business park in Beijing.


CapitaRetail China Trust (CRCT) reported a 13.2 per cent rise in first-quarter distributable income to $19.6 million, due mainly to new contribution from CapitaMall Grand Canyon, and stronger tenant sales and rentals at its malls. CRCT's portfolio of 10 shopping malls managed to garner a rental reversion of 23 per cent for the quarter.


DBS Research Group Equity, which kept a buy call on CRCT, cited its "strong growth profile over the next two years on contributions from new malls", along with upgrades at existing properties.


Another strong performer is Mapletree Commercial Trust, which got upgraded to a "buy" by DBS after adjusting for higher contributions from VivoCity, PSA Building and Mapletree Anson for the fourth quarter.


Starhill Global Reit netted a "hold" call from DBS, which sees Singapore and Australia continuing to drive the Reit's income growth. "Looking ahead, performance at Wisma should improve in the second and third quarters as new tenants begin to gain traction. Forex risk remains a concern.


Revenue and net property income from Australia grew 16 per cent and 10 per cent respectively, largely attributable to new contribution from Plaza Arcade in Perth (acquired last March), although dampened somewhat by the depreciation in Australian dollar," DBS said.


Broker OSK-DMG is cautious. "First-quarter results were largely below par with the 11 Reits under our coverage averaging -5 per cent against our estimates. However, ongoing renewals, completion of asset enhancement initiatives and recent acquisitions should lift earnings this second half."