DECEMBER 04, 2012
CIMB cautious on Reits, others remain upbeat
It is time for investors to pull back from Reits, says CIMB, even as other research houses continue to back the sector.
The research house downgraded the sector to underweight from overweight on the grounds of its poor risk-reward at current valuations and emerging risks from expensive acquisitions and capital-raising.
Analyst Kenneth Ng said in a report: "We think it does not pay to stay too bearish and continue taking shelter in yields."
He said Reits are unlikely to record the kind of strong growth they enjoyed between 2004 and 2008, given the increased caution on leverage and acquisitions after the global financial crisis (GFC).
"With debt aversion a post-GFC characteristic, more could opt for a higher portion of equity funding in acquisitions," said CIMB.
It added that it expects more acquisitions in the coming year on the back of easier accretion, particularly for Reits with pipeline assets from sponsors.
Operational performances remain resilient, with retail Reits remaining well-supported by full employment; office Reits are expected to bottom, supported by tenants from non-finance industries, and supply pressure could be alleviated by the removal of older inventory.
Industrial tenants could face cost pressures and demand weakness; in the hotel segment, the supply of new rooms and added pressure from less corporate travel, cap revenue per available unit upside.
Nevertheless, other research houses are still positive on Reits.
Impressed by the results they posted in the third quarter, both DMG Research and UOB-Kay Hian have maintained overweight on the sector.
UOB-Kay Hian said late last month that Singapore Reits have the most attractive yield spreads regionally, and a yield compression to the long-term levels implies another 23 per cent capital upside.
DMG Research expects Reits to remain favourable in the near term.
Its analyst Pang Ti Wee said: "Going forward, as the Singapore dollar continues to stay strong, coupled with volatility in the global market and negative real interest rates - after taking inflation into consideration - we continue to overweight on the Reits space as a whole, but favour office and retail Reits."
With the prevailing low interest rate environment, Reits will be encouraged to strengthen their balance sheets for future acquisitions of more investment properties.
At the same time, DMG sees rising risks of further capital-raising activities in the near future.
Mr Pang said: "As trading valuations continue to remain high... accretive acquisitions can be made much easier than before.
"However, given a high valuation and compressed cap values, some of the Reits could end up overpaying, or venture into unchartered territories overseas."
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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