Are REITS still at­trac­tive?

Singapore Business Review - - FIRST -

The past few years have been kind to in­vestors in Sin­ga­pore’s listed real es­tate in­vest­ment trusts, or REITS. With in­ter­est rates at record lows, these lovely hold­ing com­pa­nies of shop­ping malls and re­tail and of­fice spa­ces have re­turned a good clip to in­vestors. But with in­ter­est rates in Amer­ica ris­ing and Sin­ga­pore set to fol­low suit, are Sin­ga­pore’s REITS still a good in­vest­ment idea? Ac­cord­ing to OCBC, the sec­tor is still worth a look but the value is no longer “com­pelling.”

One rea­son in­vestors like REITS so much is that they of­fer a far higher yield than Sin­ga­pore Gov­ern­ment bonds. The FTSE ST REIT In­dex is cur­rently trad­ing at 4.23% higher than Sin­ga­pore Gov­ern­ment’s 10-year bond yield. As an in­ter­est­ing aside, the re­search firm com­pared REITS in other mar­kets and found that in Eu­rope the dif­fer­ence was 4.15%, in Ja­pan 3.79%, Hong Kong 3.25%, Aus­tralia 2.55%, and the United States just 2.05%.

So com­pared to other mar­kets, Sin­ga­pore does look to of­fer a bet­ter mar­gin over Gov­ern­ment bonds which carry no risk. Nev­er­the­less, ris­ing in­ter­est rates will dampen in­come for the REITS as they will have higher bor­row­ing costs, so in­vestors should be se­lec­tive. Mean­while, DBS reck­ons that with con­sen­sus ex­pec­ta­tions for Sin­ga­pore’s GDP growth to be re­vised up­wards to GDP growth of 2.3%, of­fice and in­dus­trial REITS, specif­i­cally the busi­ness parks and hi-tech seg­ments, should do well.

With the sup­ply for both sec­tors eas­ing from next year, the bro­ker­age be­lieves the prospects of a re­cov­ery in spot rents next year are in­creas­ing, which is sup­port­ive of its pos­i­tive stance on the of­fice and in­dus­trial space. On the other hand, the other risk to re­tail REITS is the im­mi­nent launch of e-com­merce gi­ant Ama­zon which could eat into mall re­tail earn­ings.

In terms of over­all S-REIT val­u­a­tion, the av­er­age yield spread is at 4.1%, close to the av­er­age yield spread of 4.2% since 2010, says DBS. It notes down­side risk to S-REIT share prices are lim­ited near term, tak­ing into con­sid­er­a­tion the risk of a very hawk­ish Fed re­ced­ing.

The sec­tor is still worth a look but the value is no longer “com­pelling.”

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