SINGAPORE-LISTED real estate investment trusts (Reits) are shaping up to be among the top choices for investors in the new year.
Thanks to the improved economy and low interest rates, Reits have refinanced their debt and made aggressive acquisitions this year. Their overall business has also strengthened on the back of rebounding rental rates.
The FTSE ST Reits index, which measures the value of 17 Singapore-listed Reits, has jumped 10 per cent since the start of the year, outperforming the real estate developers' index's 6 per cent gain.
Almost every sub-sector of the Reit market was represented among the five highest-yielding trusts of the year, which is topped by Lippo-Mapletree Indonesia Retail Trust and followed by health-care trust First Reit, office space supplier Ascendas India Trust, industrial Reit AIMS AMP Capital and Frasers Commercial Trust.
Looking to next year, Reits are viewed as being in a strong position to continue this success story, the only fly in the ointment being the fact that their prices have increased and yields have fallen.
DBS Vickers analyst Derek Tan thinks Reits will deliver distributable income growth of 10 per cent on average next year. Debt financing should not be a problem, he said, as economists expect interest rate hikes to occur only towards the end of next year.
OCBC Investment Research analyst Ong Kian Lin agreed, noting that many Reits are taking advantage of the existing low interest rates to refinance their debt and are seeking longer debt tenures of more than three years.
'Overall, debt profiles remain healthy with an average gearing of 29.6 per cent and average borrowing costs of 3.8 per cent,' he added.
According to Kim Eng analyst Anni Kum, exciting acquisition announcements are on the horizon.
The trend of looking overseas for purchase targets is set to grow - especially in the health-care sub-sector, where the number of properties available in Singapore is limited.
Chief executive of Parkway Trust Management, the manager of Parkway Life Reit, Mr Yong Yean Chau, is confident that next year will be a good year, with Asia's ageing population and growing affluence boosting the need for a solid health-care infrastructure.
'With the growing health-care pie, we are seeing good opportunities for growth, as health-care operators increasingly adopt asset-light strategies to channel their precious resources to their core activities,' he told The Straits Times.
'This represents an enlarged pool of properties available in the market and more opportunities for Parkway Life Reit to grow via acquisition.'
After being sidelined this year, many analysts single out hospitality Reits as the ones to watch because of the expected strengthening of Singapore visitor numbers.
DBS Vickers' Mr Tan forecasts that the distributable income of hospitality and health-care Reits will rise 33 per cent next year. His top picks for hospitality Reits are CDL Hospitality Trusts (CDL HT) and Ascott Residence Trust.
Analysts from DMG & Partners Securities, JP Morgan and Credit Suisse also expect CDL HT to outperform the market, while Ascott is a favourite at Credit Suisse and OCBC Investment Research.
On office and industrial Reits, analysts are more divided.
Nomura's South-east Asia head of equity research, Mr Lim Jit Soon, believes office Reits will be the leading performers among all sub-sectors as job growth drives up demand for office space.
But others, including DBS Vickers' Mr Tan, are more sceptical.
He believes distributable income of office Reits will actually shrink by 3 per cent next year, with such trusts facing topline pressure from renewing rents that were signed during the peak of the previous office cycle in 2007 and 2008.