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The Straits Times Published on Aug 31, 2013

Reits tumble but 'operations still solid'

Income streams resilient despite 21% drop from peak in mid-May
By Jonathan Kwok

REAL estate investment trusts (Reits) have tumbled in recent weeks, removing much of the froth that had accumulated in the sector over the past year. Still, the sector is comfortably above its 2010 and 2011 levels, before the third round of money-printing by the United States central bank started driving up prices last year. The FTSE ST Reit Index of such counters has tumbled 21 per cent since its peak in mid-May, taking it to an 11 per cent loss for the year to date. Based on the index value of 699.76 points yesterday, the dividend yield across the Reit sector is 5.3 per cent, according to Bloomberg data. The yield was calculated by adding all dividends paid out over the past 12 months, divided by the latest stock prices. Analysts say the price falls could be attributed to funds flowing out of the region and investors demanding higher yields now that the United States Federal Reserve looks likely to begin slowing its money-printing within this year. However, the fundamentals and operations of Singapore Reits remain solid, they say. "Despite reporting a firm set of financial performance in the second quarter of 2013 (with top line growing and stable interest costs), Singapore Reit share prices continue to remain under pressure," said DBS Vickers Research this month. "The weakness in share prices appears to derive from fund outflows and heightened required returns rather than weakening fundamentals." Macquarie Equities Research said that the latest results of Singapore Reits proved that their income streams remain resilient. "Almost all the Singapore Reits under our coverage reported in-line results. We expect distribution per unit growth of 3 per cent in the 2013 financial year (for the sector) and 4.5 per cent in financial year 2014." Macquarie said that rental growth was better than expected, especially in the industrial sector. It is "overweight" on Reits and "underweight" on Singapore residential developers. Reit prices remain above levels seen in 2010 and 2011 - when the economy was recovering strongly from the global financial crisis of 2008 and 2009, and before the Fed's bond-buying spree drove up prices last year. The FTSE ST Reit Index traded at an average value of 641.58 points during 2010 and 2011, so its current value is still 9 per cent above that. The average yield of Singapore Reits was higher at 6.05 per cent during those years, compared with the current yield of 5.3 per cent. Unit prices move in opposite directions to yields. When Reit prices fall, distribution yields will rise. In short, this means that you would have got a better deal if you had bought in 2010 and 2011, compared to now. However, buying now would still be better than if you had bought in May this year: At that time, the average yield of the sector was as low as 4.3 per cent, Bloomberg data shows.

These yields refer only to the average of the Reit sector; sub-sectors like retail Reits will trade at lower yields as they are considered to be lower-risk, while those with higher risk like industrial landlords will trade at higher yields. In terms of individual Reits, DBS Vickers likes Cache Logistics Trust, Suntec Reit and CapitaRetail China Trust, saying that "most of the negatives are already priced in" for these counters. It also likes hotel owner CDL Hospitality Trusts, though technically, the vehicle is a stapled security rather than a pure Reit. As for sectoral Reits, OCBC Investment Research is "overweight" on local retail Reits - basically those that own and lease out units in Singapore shopping malls. But OCBC is "neutral" on health-care Reits, citing their pricey valuations and the current negative sentiment surrounding interest-rate sensitive instruments. The sentiment is due to concerns that the money-printing from the Fed may begin slowing down at the next policy meeting in the middle of next month, said OCBC. Within the health-care sector, First Reit and Parkway Life Reit are listed in Singapore.
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