Wednesday, October 21, 2009

Business Times: Reits likely to see more drops in asset values

October 21, 2009
Reits likely to see more drops in asset values
Prices of retail and industrial Reits have yet to reflect risks, says Nomura

REAL estate investment trusts (Reits) are likely to experience more drops in
asset values and negative rental reversions, according to Nomura Singapore.

Furthermore, the research house believes that prices of retail and industrial
Reits have yet to reflect these risks.

'With asset values likely to see further downward adjustments, the fact that
retail and industrial Reits are now trading near to or at premiums to book value
appears somewhat inconsistent with property market trends,' wrote analysts Tony
Darwell and Sai Min Chow in an Oct 16 report.

Investor interest has returned to Reits in the last few months as the sector
largely managed to refinance its loans. The FTSE Real Estate Investment Trust
Index has risen by more than 50 per cent since the start of the year.

But Nomura believes that downside risks remain. It estimates that capitalisation
rates - a rough measure of properties' rates of return - have softened by around
25-75 basis points and could drop by another 25-50 basis points.

The outlook for rents also remains weak, Nomura said. And while prices of office
Reits reflect the various risks, the same cannot be said of retail and
industrial Reits.

'We see risks being priced into the office sector, though we retain our view
that the market has been too complacent in its assessment of the retail and
industrial Reit sectors,' its analysts wrote.

The research house is particularly bearish on CapitaMall Trust (CMT) and
Ascendas Reit (A-Reit). CMT gained four cents to close at $1.80 yesterday, while
A-Reit lost eight cents to close at $1.86.

DMG & Partners Securities expressed different views in a separate Oct 16 report.
It is more pessimistic about the office sector's prospects, because of the large
amount of space coming on-stream.

Landlords in the Raffles Place district 'will almost certainly be scrambling to
put forward highly competitive rates, a scenario that could further dampen the
already fragile rental market,' wrote analyst Jonathan Ng. 'We believe
CapitaCommercial Trust could feel the biggest impact.'

DMG was more sanguine about the hospitality sector's performance - the
integrated resorts could draw more visitors, driving hotel occupancies and
pricing powers up.

The house has a 'buy' call on CDL Hospitality Trust (CDLHT), and believes that
the counter is the 'best proxy to a multi-year tourism resurgence that will take
place next year'.

CDLHT ended trading at $1.56 yesterday, one cent up.

Team Marshe
Martin Koh/ Sherry Tang
93833992/ 98444400

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