Reits look like good bets to yield-hungry investors

The Straits Times 22 May 2013

They continue to post gains while earnings in other sectors disappoint

SINGAPORE real estate investment trusts (Reits) are among the hottest assets in town to own.

All the 23 Reits listed on the Singapore Exchange - whether invested in shopping malls, commercial buildings or factories - have posted gains this year.

The FTSE ST Reits Index, which tracks their performance, is up 12.7 per cent since January, outperforming the blue-chip Straits Times Index, which has risen 8.7 per cent.

Outperformers include the Hong Kong-based Fortune Reit, which has surged 30.3 per cent; Keppel Reit, up 20.8 per cent; and Cambridge Industrial Trust, ahead by 25.2 per cent.

With banks paying savers next to nothing in interest for their savings, it is likely that Reits will continue to be sought after by yield-hungry investors.

Even analysts who had been bearish on the sector have been forced to change their views.

CIMB research head Kenneth Ng noted in his latest strategy report that there is a "safety bubble" with investors wanting yield and earnings visibility in the shares they buy - and this has caused a run-up in sectors such as Reits.

Upgrading his call on Reits from underweight to neutral, he said: "Yes, we capitulate in the face of this growing safety bubble."

Reits operate in a similar manner to unit trusts but specialise in investing in income-generating property. What makes them so desirable is their continued ability to perform to expectations in the first quarter despite the earnings disappointment seen in other sectors.

Mr Ng said: "Even though valuations are not cheap, with the ample liquidity, continued earnings disappointment from other sectors and benign interest rate risk, it appears that expensive valuations may not be a reason to sell entirely."

There is also the prospect of Reits boosting their earnings further by using the cheap funding to make new acquisitions or enhance their existing assets, he added.

Maybank Kim Eng analyst Ong Kian Lin suggested holding retail Reits such as Starhill Global and CapitaMall Trust as their first-quarter results showed that they had the highest growth in distribution per unit.

A big concern about Reits is refinancing risk. Many were hammered during the global financial crisis five years ago because of the fear that banks would not roll over their debts.

But Mr Ong noted that such a risk has lessened as the debt tenure has lengthened from 2.7 years during the 2008 and 2009 period to 2.92 years as at the end of March.

Still, the big prize for investors may be taking huge bets on upcoming Reit initial public offerings rather than those already listed. Standard Chartered Equity Research analyst Regina Lim said in Ogilvy Public Relations her report: "In 2006 and the first half of 2007, new Reit listings enjoyed a 33 per cent upside in the first three months on average as they were offered at 1.07 times price-to-net asset value (P/Nav), as compared to the sector average of 1.38 times P/Nav."

Singapore Press Holdings and Overseas Union Enterprise are among companies looking to float real estate assets as Reits.