Saturday, August 18, 2012

Experts split over how long Reits' rally can last


Straits Times: Sat, Aug 18

WITH banks paying next-to-nothing on savings, investors have turned in a big way to high-yielding real estate investment trusts (Reits).

The demand has made Reits one of the best-performing asset classes on the local bourse.

The FTSE ST Reit Index, which tracks 24 Reits, has risen 23 per cent this year, outperforming the benchmark Straits Times Index, which is up 15.8 per cent.

Yet market experts are divided over the wisdom of ploughing more money into them.

DBS Vickers analysts Janice Chua and Ling Lee Keng suggested yesterday that it may be time to "top-slice" yield plays such as Reits, because the rally has caused their yields to fall to 4.5 per cent from 6 per cent in March, so further upside may be limited

Over the past month, their team has downgraded telecom stocks and Reits that had outperformed - CapitaMall Trust, CapitaCommercial Trust, Cache Logistics, CDL Hospitality Trusts and Ascendas India Trust.

This may not be surprising, considering that in the 12 months since the market was spooked by the euro zone debt crisis, some Reits have registered double-digit percentage gains.

Traders have also noted that, rather than put more money in Reits, investors have been placing bets on real estate developers as the appetite for private homes in the mass condo market continues unabated.

This has seen the FTSE ST Real Estate Index, which tracks 28 property developers and Reits, move almost in tandem with the FTSE ST Reit Index since April.

But Deutsche Bank analysts Gregory Lui and Elaine Khoo argued that Reits make safer investments than buying houses.

Low interest rates and a strengthening Singdollar should continue to make Reits attractive, even with the compression in their yields.

What also makes Reits attractive is the effort made by some of them to lengthen the maturity of their bank borrowings and look for alternative sources of capital to finance their acquisitions.

This had been one concern dogging Reits late last year, given the fear that they might face a credit crunch as European lenders were forced to scale back on their lending because of problems back home.

It was the crushing debt burden shouldered by some Reits that caused their prices to drop way below book values during the global financial crisis four years ago.

Mr Lui and Ms Khoo noted that Reits enjoy a comfortable debt gearing of about 31 per cent, which will give them flexibility to make acquisitions.

Acquisitions can support upside to earnings, especially for industrial Reits and those with strong sponsors, they said.

But in a recent note, JPMorgan analyst Joy Wang noted that while Reits are attractive because of their high dividend yields, she preferred real estate developers because they trade at a discount to book value.

Among the Reits, her preferences are for those in the office sector because they are still trading below book value and may enjoy a revival in rental. CapitaCommercial Trust, for example, trades at an 8 per cent discount to book value, she said.

  
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