Monday, July 9, 2012

Reits - a look beyond the yields

Straits Times: Mon, Jul 09

[SINGAPORE] Since they were launched 10 years ago, real estate investment trusts (Reits) in Singapore have earned a reputation as a defensive asset that pays out regular dividends.

That reputation is well- deserved. Data compiled by BT show that despite market volatility over the years, investors who put their money in Singapore's 22 Reits since day one would have lost money only in four.

On average, annual compounded returns for Reits were 8 per cent a year - beating the 10-year returns of the Straits Times Index (5 per cent), property (6 per cent) and government bonds (4 per cent).

Reits are generally divided into three main categories of retail, office and industrial, corresponding to the type of properties they own. A small proportion of Reits also invest in hospitality, healthcare and residential assets.

Reits across all sectors have done well.

The best returns have come from industrial Reits, partly due to the supply shortage over the last few years.

Mapletree Industrial Trust, which listed two years ago, clocked the highest annual return of 25 per cent.

Reits that own malls in Singapore have also done well given the resilience of the retail scene here.

CapitaMall Trust, Frasers Centrepoint Trust and Mapletree Commercial Trust all returned around 15 per cent a year and are trading at a premium to their net asset values.

For the office sector, annual returns have also been more than 10 per cent for CapitaCommercial Trust and Suntec Reit.

Reits generate cash from rental payments made by tenants.

After deducting costs, they return most of their income to investors in the form of distributions.

This is because of a rule where distributions enjoy tax-free status as long as 90 per cent of distributable income is paid out.

Moreover, distributions tend to be predictable as lease agreements are signed for several years.

As a result, Reits have been very popular with institutional investors.

But not many retail investors understand the nature of Reits, said Suntec Reit chief executive Yeo See Kiat. "They seem to say it's just another company; they think it's an equity. But we are much more than that because we're all yield driven, and have guidelines to deliver," he said.

Analysts say a key misconception investors hold is that Reits are growth stocks with huge potential capital gains.

Reits are not growth stocks and are yield-generating assets instead, said Mark Ebbinghaus, Standard Chartered's global head of real estate. He was speaking at a Real Estate Investment World Asia 2012 panel discussion late last month.

Mr Ebbinghaus noted that Reits cannot compete with equities in a bull market.

While Reits can grow by acquiring assets, this is more of a "nice to have" factor, he said.

"The problem looking at the Reit market for the last 20-odd years is when . . . everyone gets on the earnings-accretive bandwagon people get a little bit deluded and see Reits as growth stocks . . . You know it's the beginning of the end," he said.

Reits, as assets with predictable cash flows, have their place "in a world which is lacking confidence and lacking leadership", he added.

They are attractive because they are trading just below their net asset values, even as the world is "still underweight Asia".

"When risk is back on, capital will flow back," he said.

Roger Tan, chief executive of SIAS Research, said investors should treat Reits as alternative investments, similar to the category of property, gold and commodities.

So a simple asset allocation model will see an investor putting one-third of his money in equities, one- third in bonds, and one- third in alternative investments, he said.

Reits are in the middle of the risk spectrum as they are not as risky as equities, though they are more risky than bonds, he said.

Analysts believe Reits will continue to outperform the market.

In a report on June 15, Standard Chartered Bank upgraded its outlook on five Reits, and now has an "outperform" rating on 15 Reits under its coverage.

Similarly, OCBC Investment Research head Carmen Lee said in June's BT Wealth magazine that the research team is "currently overweight on the S-Reit sector".

Analysts say that before plonking their money into a Reit, investors need to consider several factors that affect its performance.

Macroeconomic conditions, as well as the demand and supply situation for their properties, will affect rentals and occupancy rates - and in turn income.

Investors also need to evaluate the quality of the assets Reits hold, such as whether they are well-located and thus attractive to tenants.

Given how Reits pay out almost all their income and cannot hold much cash, the skill of the Reit manager in squeezing value out of available assets is also important.

This can be done through asset enhancement initiatives which can generate a positive return on investment if done right.

Investors also need to look at the capital structure of the Reit and how much debt it is holding.

This is critical in a credit crunch situation like the 2008-2009 global financial crisis. Debt was maturing at the heart of the crisis and there was a real risk that several Reits could not refinance them.

One of those was MacarthurCook Industrial Reit, which eventually secured a contentious $430 million rescue deal in November 2009 through a discounted share sale to cornerstone investors, among them AIMS Financial Group and AMP Capital Holdings. The Reit was renamed AIMS AMP Capital Industrial Reit.

Investors who bought in at MacarthurCook's launch saw their holdings severely diluted and still have some way to go before they claw back their original investment - though the Reit has returned 45 per cent since January 2010 and is among the top Reits in terms of price appreciation this year.

Investors should also consider the financial and real estate backers supporting the Reit.

Strong financial backers can offer cheaper financing, and real estate developers can provide a steady pipeline of buildings that Reits can take into their portfolio.

Finally, investors have to be aware that because Reits pay out 90 per cent or more of their income, they cannot hold much cash and might go back to investors for more.

Asset purchases will likely be funded by rights issues, selling discounted placement shares to institutional investors, or adding more debt.

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C
Senior Sales Director
DTZ Debenham Tie Leung (SEA) Pte Ltd (L3006301G)

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