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30-10-2011, 08:36 AM
Are REITs really under-valued?
The Straits Times
Oct 30, 2011
Property is now a matter of trust
Analysts say Reits, currently undervalued, are the way to go
By Yasmine Yahya
In a volatile stock market, investors are advised to return to the basic principles of investing: stick to buying defensive stocks with high-dividend yields and what better way than to buy into real estate investment trusts (Reits)?
The prices of Singapore-listed Reits, or S-Reits, have fallen quite sharply this year, which means that most are now cheap.
The FTSE ST Reits sub-index has plunged 9.5 per cent since the start of the year.
A Julius Baer report on Oct 20 noted that hospitality Reits have fared the worst, falling 23 per cent this year.
Office Reits performed marginally better, sliding 22 per cent, while industrial Reits slipped 7 per cent and retail Reits dropped 5 per cent.
The only Reits to turn in positive returns this year are those in the health- care sub-sector, which are up 10 per cent, Julius Baer said.
Analysts from various brokerage houses agree that Reits are currently undervalued and could make for good additions to a portfolio.
Furthermore, Singapore-listed Reits have much stronger balance sheets now than during the Asian financial crisis of 1998 and would likely be able to weather the economic downturn better this time around, they say.
'Compared to the time of the Lehman crisis, conditions in the credit market now appear favourable to the S-Reits sector,' wrote Royal Bank of Scotland (RBS) analyst Bryan Lim in a report earlier this month.
He was referring to the 2008 collapse of US investment bank Lehman Brothers, which caused chaos on stock markets around the world.
'We expect S-Reits to benefit from the availability of cheap funding, given that we expect the current low interest rate environment to continue for the next two years,' he added.
Deutsche Bank analyst Elaine Khoo told The Straits Times that she believes it is less likely that S-Reits will have to recapitalise as their balance sheets are now stronger and managers have been more proactive in capital management.
'Book asset values for most companies are still below peak levels and most can withstand writedowns of 5 to 10 per cent,' she said.
'What compelled the Reits to recapitalise during the last crisis were balance sheet and refinancing concerns amid severe credit market dislocation.'
If there is equity raising, that will likely be to fund acquisitions with most still looking to grow, she added.
Phillip Securities investment analyst Travis Seah believes investors should still stay out of the market for the time being, but those with a long- term view and some extra cash would do well to invest in Reits, he said.
'With the market still clouded with uncertainties and the downside risks outweighing the upside potential, we would advise investors to stay on the sidelines and await for better emerging values,' he said.
'However, Reits can be a good equity investment, given that investors have a mid- to long-term horizon of at least three years and above.
'Instead of depositing your savings in a bank, Reits can earn you a decent annual dividend yield ranging from 5 to 10 per cent, to beat or at least be on a par with the headline inflation of approximately 5 per cent, to prevent value erosion.'
But this advice is applicable only to investors who have a cash surplus and no immediate commitments in the short run, he noted.
So if you have some extra cash to invest and you are in the market for a Reit or two, which ones should you buy?
Health-care Reits
There are only two health-care Reits listed here - Parkway Life Reit and First Reit.
Parkway Life Reit has increased 9.6 per cent in value since the start of the year, while First Reit has risen 9 per cent.
Analysts believe they will only keep gaining strength. As Phillip Securities' Mr Seah notes, both Reits have a long-term lease structure, 100 per cent committed occupancy and stable and sustainable revenue and dividend payout.
Furthermore, a majority of their leases come with a rental escalation clause that is pegged to the inflation rate, he said.
Last Monday, Sias Research urged investors to increase their exposure to First Reit, following the release of its strong third-quarter results. Sias Research analyst Kenneth Lui wrote in a report that the trust's recently acquired properties, the Mochtar Riady Comprehensive Cancer Centre in Indonesia and the Sarang Hospital in South Korea, are still under-utilised, which indicates future topline growth.
Office Reits
Even though the prices of office Reits have declined over 20 per cent this year, most analysts are still rather bearish on the sub-sector, as the outlook for office rentals is not very bright.
Credit Suisse wrote in a report earlier this month: 'We now expect (office) rents to stay flat from now till 2013, especially for the Grade A space, supported by recent signed leases and our checks with the office Reits, which are not looking to cut rents at this stage.'
If you really must invest in an office Reit, Credit Suisse advises that you stick to those with mainly prime Grade A offices in their portfolios.
'We believe that the longer-term fundamentals remain intact, especially for Grade A buildings, as $10 to $11 per sq ft (psf) rents today are still at a 40 to 50 per cent discount to 2008's $18.40 peak,' Credit Suisse analysts noted.
'Also, Singapore still appears attractive as an office location, as rents are still 50 per cent below those of Hong Kong.'
Credit Suisse is most optimistic about CapitaCommercial Trust and K-Reit Asia.
RBS' Mr Lim has a 'buy' call on Suntec, saying: 'We expect Suntec Reit to announce its plans to refurbish Suntec City mall by year end and we see this as a strong short-term catalyst for the stock.'
CIMB, meanwhile, is bullish on Mapletree Commercial Trust. 'As its largest asset, an under-rented VivoCity should provide strong impetus for future growth,' CIMB analyst Janice Ding wrote in a note last Friday.
Industrial Reits
In mid-October, Credit Suisse analysts explained their negative stance towards the industrial Reit sector.
'We believe that the perception of its defensiveness, due to longer lease tenures, is misplaced,' they wrote.
Industrial rents have surpassed the peaks seen in 2007 and are at 10-year highs, they noted.
'We believe that the upside is limited from here on, given the moderating economic growth outlook, Singapore's high exposure to the US and European economies and the appreciating currency which will reduce Singapore's competitiveness as an industrial location of choice.'
Nonetheless, Credit Suisse is bullish on one industrial Reit: Mapletree Logistics Trust (MLT).
They believe the stock is less susceptible to a slowdown in the Singapore economy, given that over 50 per cent of its net property income is derived from overseas assets.
'Mapletree Logistics Trust also has a strong acquisition pipeline from its parent, Mapletree Investments, worth $1 billion, which can potentially boost MLT's asset base by 25 per cent,' they wrote.
Deutsche Bank has a 'buy' call on Mapletree Industrial Trust (MIT), with analyst Elaine Khoo saying that the trust's solid second-quarter results reflected firm underlying growth trends, despite economic uncertainties. 'We still like MIT's strong organic growth proposition and attractive yield,' she added.
OCBC Investment Research has a 'buy' call on Cache Logistics Trust, citing its healthy debt level and rising warehouse rentals.
Consultancy CB Richard Ellis said average island- wide monthly gross rents for warehouses rose by up to 3.6 per cent quarter-on-quarter in the three months to September.
'This supports our view that Cache is relatively well-protected from the market downturn and negative rental reversions, even when the leases come due,' said OCBC analyst Kevin Tan.
Retail and hospitality Reits
Though the economy may be going through uncertain times, analysts are largely positive on retail and hospitality Reits, as they expect tourist arrivals to remain strong.
'We do not expect a repeat of 2009 in terms of tourist declines just yet with regional economies still expected to grow, albeit slower, and tourist arrivals in past months still fairly unscathed,' CIMB's Ms Ding wrote in a report last Tuesday.
CIMB is most bullish on Frasers Commercial Trust and CDL Hospitality Trust over the long term.
Daiwa analyst David Lum also has a 'buy' call on CDL Hospitality, saying in a report last Tuesday that his forecasts for the trust's distribution per unit for the next two years are higher than other analysts' projections.
'We believe the market could be overestimating the severity of the forthcoming economic downturn and underestimating the tourist-drawing power of Singapore's two integrated resorts,' he noted.
RBS' Mr Lim, meanwhile, counts CapitaMall Trust (CMT) as one of his top two picks of all the S-Reits.
'We like CMT's portfolio of quality malls which we believe can provide a steady and resilient stream of income,' he said.
'CMT also has the ability to extract more growth through asset enhancement projects. For example, it is refurbishing Iluma and this should help to improve the mall's (rental) yield to 5.8 per cent from the current 3.8 per cent.'
yasminey@sph.com.sg
The Straits Times
Oct 30, 2011
Property is now a matter of trust
Analysts say Reits, currently undervalued, are the way to go
By Yasmine Yahya
In a volatile stock market, investors are advised to return to the basic principles of investing: stick to buying defensive stocks with high-dividend yields and what better way than to buy into real estate investment trusts (Reits)?
The prices of Singapore-listed Reits, or S-Reits, have fallen quite sharply this year, which means that most are now cheap.
The FTSE ST Reits sub-index has plunged 9.5 per cent since the start of the year.
A Julius Baer report on Oct 20 noted that hospitality Reits have fared the worst, falling 23 per cent this year.
Office Reits performed marginally better, sliding 22 per cent, while industrial Reits slipped 7 per cent and retail Reits dropped 5 per cent.
The only Reits to turn in positive returns this year are those in the health- care sub-sector, which are up 10 per cent, Julius Baer said.
Analysts from various brokerage houses agree that Reits are currently undervalued and could make for good additions to a portfolio.
Furthermore, Singapore-listed Reits have much stronger balance sheets now than during the Asian financial crisis of 1998 and would likely be able to weather the economic downturn better this time around, they say.
'Compared to the time of the Lehman crisis, conditions in the credit market now appear favourable to the S-Reits sector,' wrote Royal Bank of Scotland (RBS) analyst Bryan Lim in a report earlier this month.
He was referring to the 2008 collapse of US investment bank Lehman Brothers, which caused chaos on stock markets around the world.
'We expect S-Reits to benefit from the availability of cheap funding, given that we expect the current low interest rate environment to continue for the next two years,' he added.
Deutsche Bank analyst Elaine Khoo told The Straits Times that she believes it is less likely that S-Reits will have to recapitalise as their balance sheets are now stronger and managers have been more proactive in capital management.
'Book asset values for most companies are still below peak levels and most can withstand writedowns of 5 to 10 per cent,' she said.
'What compelled the Reits to recapitalise during the last crisis were balance sheet and refinancing concerns amid severe credit market dislocation.'
If there is equity raising, that will likely be to fund acquisitions with most still looking to grow, she added.
Phillip Securities investment analyst Travis Seah believes investors should still stay out of the market for the time being, but those with a long- term view and some extra cash would do well to invest in Reits, he said.
'With the market still clouded with uncertainties and the downside risks outweighing the upside potential, we would advise investors to stay on the sidelines and await for better emerging values,' he said.
'However, Reits can be a good equity investment, given that investors have a mid- to long-term horizon of at least three years and above.
'Instead of depositing your savings in a bank, Reits can earn you a decent annual dividend yield ranging from 5 to 10 per cent, to beat or at least be on a par with the headline inflation of approximately 5 per cent, to prevent value erosion.'
But this advice is applicable only to investors who have a cash surplus and no immediate commitments in the short run, he noted.
So if you have some extra cash to invest and you are in the market for a Reit or two, which ones should you buy?
Health-care Reits
There are only two health-care Reits listed here - Parkway Life Reit and First Reit.
Parkway Life Reit has increased 9.6 per cent in value since the start of the year, while First Reit has risen 9 per cent.
Analysts believe they will only keep gaining strength. As Phillip Securities' Mr Seah notes, both Reits have a long-term lease structure, 100 per cent committed occupancy and stable and sustainable revenue and dividend payout.
Furthermore, a majority of their leases come with a rental escalation clause that is pegged to the inflation rate, he said.
Last Monday, Sias Research urged investors to increase their exposure to First Reit, following the release of its strong third-quarter results. Sias Research analyst Kenneth Lui wrote in a report that the trust's recently acquired properties, the Mochtar Riady Comprehensive Cancer Centre in Indonesia and the Sarang Hospital in South Korea, are still under-utilised, which indicates future topline growth.
Office Reits
Even though the prices of office Reits have declined over 20 per cent this year, most analysts are still rather bearish on the sub-sector, as the outlook for office rentals is not very bright.
Credit Suisse wrote in a report earlier this month: 'We now expect (office) rents to stay flat from now till 2013, especially for the Grade A space, supported by recent signed leases and our checks with the office Reits, which are not looking to cut rents at this stage.'
If you really must invest in an office Reit, Credit Suisse advises that you stick to those with mainly prime Grade A offices in their portfolios.
'We believe that the longer-term fundamentals remain intact, especially for Grade A buildings, as $10 to $11 per sq ft (psf) rents today are still at a 40 to 50 per cent discount to 2008's $18.40 peak,' Credit Suisse analysts noted.
'Also, Singapore still appears attractive as an office location, as rents are still 50 per cent below those of Hong Kong.'
Credit Suisse is most optimistic about CapitaCommercial Trust and K-Reit Asia.
RBS' Mr Lim has a 'buy' call on Suntec, saying: 'We expect Suntec Reit to announce its plans to refurbish Suntec City mall by year end and we see this as a strong short-term catalyst for the stock.'
CIMB, meanwhile, is bullish on Mapletree Commercial Trust. 'As its largest asset, an under-rented VivoCity should provide strong impetus for future growth,' CIMB analyst Janice Ding wrote in a note last Friday.
Industrial Reits
In mid-October, Credit Suisse analysts explained their negative stance towards the industrial Reit sector.
'We believe that the perception of its defensiveness, due to longer lease tenures, is misplaced,' they wrote.
Industrial rents have surpassed the peaks seen in 2007 and are at 10-year highs, they noted.
'We believe that the upside is limited from here on, given the moderating economic growth outlook, Singapore's high exposure to the US and European economies and the appreciating currency which will reduce Singapore's competitiveness as an industrial location of choice.'
Nonetheless, Credit Suisse is bullish on one industrial Reit: Mapletree Logistics Trust (MLT).
They believe the stock is less susceptible to a slowdown in the Singapore economy, given that over 50 per cent of its net property income is derived from overseas assets.
'Mapletree Logistics Trust also has a strong acquisition pipeline from its parent, Mapletree Investments, worth $1 billion, which can potentially boost MLT's asset base by 25 per cent,' they wrote.
Deutsche Bank has a 'buy' call on Mapletree Industrial Trust (MIT), with analyst Elaine Khoo saying that the trust's solid second-quarter results reflected firm underlying growth trends, despite economic uncertainties. 'We still like MIT's strong organic growth proposition and attractive yield,' she added.
OCBC Investment Research has a 'buy' call on Cache Logistics Trust, citing its healthy debt level and rising warehouse rentals.
Consultancy CB Richard Ellis said average island- wide monthly gross rents for warehouses rose by up to 3.6 per cent quarter-on-quarter in the three months to September.
'This supports our view that Cache is relatively well-protected from the market downturn and negative rental reversions, even when the leases come due,' said OCBC analyst Kevin Tan.
Retail and hospitality Reits
Though the economy may be going through uncertain times, analysts are largely positive on retail and hospitality Reits, as they expect tourist arrivals to remain strong.
'We do not expect a repeat of 2009 in terms of tourist declines just yet with regional economies still expected to grow, albeit slower, and tourist arrivals in past months still fairly unscathed,' CIMB's Ms Ding wrote in a report last Tuesday.
CIMB is most bullish on Frasers Commercial Trust and CDL Hospitality Trust over the long term.
Daiwa analyst David Lum also has a 'buy' call on CDL Hospitality, saying in a report last Tuesday that his forecasts for the trust's distribution per unit for the next two years are higher than other analysts' projections.
'We believe the market could be overestimating the severity of the forthcoming economic downturn and underestimating the tourist-drawing power of Singapore's two integrated resorts,' he noted.
RBS' Mr Lim, meanwhile, counts CapitaMall Trust (CMT) as one of his top two picks of all the S-Reits.
'We like CMT's portfolio of quality malls which we believe can provide a steady and resilient stream of income,' he said.
'CMT also has the ability to extract more growth through asset enhancement projects. For example, it is refurbishing Iluma and this should help to improve the mall's (rental) yield to 5.8 per cent from the current 3.8 per cent.'
yasminey@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
