ANALYSTS ARE PLAYING it safe and reverting to recommending the REIT sector in view of the volatile trading conditions of the past four weeks.
The STI tested the 3,021 level on Feb 20 before falling to 2,906, then advancing to 3,026 by Mar 14 and closing at 2,990 on Mar 23.
They point out that during 2011 when the STI lost 18%, the FTSE REIT Index fell less than 10%. Now, with economic and political uncertainty in China and the Euro debt crisis still unresolved, OSK Research believes that that REITs supported by “multi-years of stable rental income” should outperform the equity market.
But, with some 26 REITs listed on the Singapore Exchange, how do you separate the wheat from the chaff?
OCBC Investment Research believes there is a case to be made for industrial REITs. The industrial subsector offers the highest current yield of 8.1%, compared to 6.1% to 7.1% for other subsectors and 6.9% for the overall sector average, OCBC says. And although industrial REITs tend to have the highest gearing levels in the sector, these could ease.
Four industrial REITs, AIMS AMP Capital Industrial REIT (AAREIT), Ascendas REIT, Mapletree Industrial Trust and Mapletree Logistics Trust (MLT), have their financial year ends on March 31 (MLT has just changed its year end).
Revaluations of investment properties for REITs are usually announced with the year-end results, and OCBC believes that the revaluations for industrial property this year are likely to be upwards. “Looking at the trend of URA rental and price indexes over the past year, we believe the REITs may likely experience revaluation gains in their portfolios. This may in turn provide some relief on their aggregate leverages, which have mostly been rising amid a spate of acquisitions,” the report states.
OSK Research says that industrial REITs which tend to have longer weighted average lease expiries (WALE) of five years or more are also “liked” due to their ability to provide relatively stable income during economic downturns.
OCBC’s favourite in the sector is the smallish Cache Logistics Trust, because of its attractive FY12F DPU yield of 8.5% and robust portfolio.
Among the industrial REITs, OSK Research likes Cambridge Industrial Trust. It is trading at 9.1%, higher than most industrial REITs because of lease expiry concentration, with some 50% of its expiring in 2013-2014. Based on its FY12 DPU, Cambridge is trading at a 7.4% spread to 10-year bond yield, which is 280bps above its pre-crisis mean spread of 4.6%, OSK estimates. “We believe with the active management and constant effort to upgrade its portfolio, Cambridge deserves to trade at a lower spread as compared to its historical mean of 7.9%. Our target price 60.5 cents translates to a spread of 6.3%,” OSK says.
However, OSK’s favourites are the two retail REITs, CapitaMall Trust (CMT) and Frasers Centrepoint Trust (FCT). Defensive suburban malls contribute 76% to CMT’s total revenue, and all of FCT’s portfolio is suburban. CMT’s AEI (asset enhancement initiative) programme is set to bear dividends from 2Q12 onwards. It will be opening JCube in the next week or so, Iluma’s AEIs should complete by 1H12, and the Plaza Singapura-Atrium@Orchard AEI by 4Q12.
At its current trading level, CMT’s rolling 12-mth forward yield is 5.7%, OSK estimates, implying a current spread of 4.0% above risk-free. OSK has a target price of $2.06 for CMT, translating into an implied forward yield of 5.0% which represents a “reasonable” spread of 3.3%, the report says.
FCT is likely to see DPU gains from the completion of Causeway Point AEI, and positive rental reversions, Also, it will see a full-year contribution from Bedok Point, acquired in Sept last year. OSK revised upwards FCT’s target price to $1.77 (from $1.65) giving a forward yield of 5.5%, and a spread of 3.8% above risk-free.
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