Singapore REITs: Time for a re-look
Singapore REITs: Time for a re-look (6 Feb 2006)
By Winston Liew
Mon, 06 Feb 2006, 16:41:54 SGT
OCBC Report
Summary: The main theme for the REIT sector in 2006 is REIT managers' ability to meet growth expectation on the back of fewer acquirable quality properties, fiercer competition for properties and increasing cost of equity. However, on a positive note, REIT managers are able to gear up more and be more debt bias in the financing of acquisitions. To overcome the lack of quality properties, some S-REITs are tying up with sponsors/parents to warehouse properties for future acquisitions, while others are venturing abroad. But investing overseas carries greater risks and as such higher returns must be taken into consideration. We see a property yield premium of 150bps to 200bps to Singapore property yield as the minimum to justify investing overseas. As for market worries of S-REIT's valuation risks with respect to interest rate rises, we see this as being unjustified. This is because the market does not value S-REITs purely as yield stocks, but rather as high growth beta stocks. So, the focus must be on S-REITs' ability to continue to grow. In our selection criteria, our focus is on S-REITs that are least likely to disappoint. In this context, we see Suntec (BUY, fair value S$1.29) and MMP (BUY, fair value S$1.17) with P/B ratio of 1.0 x or less as having the lowest downside risks. As for the high P/B ratio S-REITs, we see MLT (BUY, fair value S$1.12) and AREIT (HOLD, fair value S$2.18) as most likely to meet growth expectations. Finally, we are also upgrading the sector rating to OVERWEIGHT from UNDERWEIGHT.
S-REITs have become popular instrument. Since debuting in the local market in 2002, Singapore REITs (S-REITs) have done well with gains in both unit prices as well as portfolio sizes/values. With the growing awareness and demand for these instruments, these S-REITs have become popular investment instruments. For example, CMT is up 174% from its IPO price to recent high of $2.63 in mid-2005, while AREIT has moved up about 200% from its low in Jan 2003 to a recent high of $2.37 in Aug 2005 for a holding period of slightly more than 2 years.
However, in an environment that has seen several rounds of interest rates hikes, there is market concern over the sustainability of S-REITs' performances in 2006.
Is the bull-run over for S-REITs?
While S-REITs started off trading in a very hesitant manner in the early years, these have now become both yield and growth stocks. In recent years, several S-REITs have gone on to add yield-accretive assets to their portfolios, resulting in a spike in unit prices. For the whole of 2005, we saw several rounds of interest rate hikes, with the US Federal Reserve hiking rates throughout 2005 at every one of the FOMC meetings, with current Fed Fund Rate at 4.5% from early 2005 of 2.2%. Similarly, we have seen Singapore's 3-mth inter-bank rate moving up 1.5% at the beginning of 2005 to 3.36% currently. In this environment, the sceptics are wondering if higher rates will result in the demise of the good run for S-REITs.
We think not. Several of the REITs have outlined in recent months their plans to grow asset by 2-3x to their target asset sizes. We see S-REITs pursuing a two-pronged strategy to grow by acquisitions as well as enhance returns from existing assets.
On average, most of the REITs are currently trading at about 1x to 1.7x price-to-book (P/B) with yields of about 4.5% to 5.8%. While the concern is likely to be on the lack of good quality acquirable yield accretive assets, the sector got a reprieve with the government's recent raising of the gearing level from 35% to 60%. This will enable REIT managers to gear up more for the financing of acquisitions, both in Singapore and overseas.
Our key picks are Suntec, MMP & MLT. Our key picks in the S-REIT segment are Suntec (BUY, fair value S$1.29) and MMP (BUY, fair value S$1.17) with P/B ratio of 1.0 x or less as having the lowest downside risks. As for the high P/B ratio S-REITs, we believe MLT (BUY, fair value S$1.12) and AREIT (HOLD, fair value S$2.18) are most likely to meet growth expectation. We are also upgrading the sector rating to OVERWEIGHT from UNDERWEIGHT.
By Winston Liew
Mon, 06 Feb 2006, 16:41:54 SGT
OCBC Report
Summary: The main theme for the REIT sector in 2006 is REIT managers' ability to meet growth expectation on the back of fewer acquirable quality properties, fiercer competition for properties and increasing cost of equity. However, on a positive note, REIT managers are able to gear up more and be more debt bias in the financing of acquisitions. To overcome the lack of quality properties, some S-REITs are tying up with sponsors/parents to warehouse properties for future acquisitions, while others are venturing abroad. But investing overseas carries greater risks and as such higher returns must be taken into consideration. We see a property yield premium of 150bps to 200bps to Singapore property yield as the minimum to justify investing overseas. As for market worries of S-REIT's valuation risks with respect to interest rate rises, we see this as being unjustified. This is because the market does not value S-REITs purely as yield stocks, but rather as high growth beta stocks. So, the focus must be on S-REITs' ability to continue to grow. In our selection criteria, our focus is on S-REITs that are least likely to disappoint. In this context, we see Suntec (BUY, fair value S$1.29) and MMP (BUY, fair value S$1.17) with P/B ratio of 1.0 x or less as having the lowest downside risks. As for the high P/B ratio S-REITs, we see MLT (BUY, fair value S$1.12) and AREIT (HOLD, fair value S$2.18) as most likely to meet growth expectations. Finally, we are also upgrading the sector rating to OVERWEIGHT from UNDERWEIGHT.
S-REITs have become popular instrument. Since debuting in the local market in 2002, Singapore REITs (S-REITs) have done well with gains in both unit prices as well as portfolio sizes/values. With the growing awareness and demand for these instruments, these S-REITs have become popular investment instruments. For example, CMT is up 174% from its IPO price to recent high of $2.63 in mid-2005, while AREIT has moved up about 200% from its low in Jan 2003 to a recent high of $2.37 in Aug 2005 for a holding period of slightly more than 2 years.
However, in an environment that has seen several rounds of interest rates hikes, there is market concern over the sustainability of S-REITs' performances in 2006.
Is the bull-run over for S-REITs?
While S-REITs started off trading in a very hesitant manner in the early years, these have now become both yield and growth stocks. In recent years, several S-REITs have gone on to add yield-accretive assets to their portfolios, resulting in a spike in unit prices. For the whole of 2005, we saw several rounds of interest rate hikes, with the US Federal Reserve hiking rates throughout 2005 at every one of the FOMC meetings, with current Fed Fund Rate at 4.5% from early 2005 of 2.2%. Similarly, we have seen Singapore's 3-mth inter-bank rate moving up 1.5% at the beginning of 2005 to 3.36% currently. In this environment, the sceptics are wondering if higher rates will result in the demise of the good run for S-REITs.
We think not. Several of the REITs have outlined in recent months their plans to grow asset by 2-3x to their target asset sizes. We see S-REITs pursuing a two-pronged strategy to grow by acquisitions as well as enhance returns from existing assets.
On average, most of the REITs are currently trading at about 1x to 1.7x price-to-book (P/B) with yields of about 4.5% to 5.8%. While the concern is likely to be on the lack of good quality acquirable yield accretive assets, the sector got a reprieve with the government's recent raising of the gearing level from 35% to 60%. This will enable REIT managers to gear up more for the financing of acquisitions, both in Singapore and overseas.
Our key picks are Suntec, MMP & MLT. Our key picks in the S-REIT segment are Suntec (BUY, fair value S$1.29) and MMP (BUY, fair value S$1.17) with P/B ratio of 1.0 x or less as having the lowest downside risks. As for the high P/B ratio S-REITs, we believe MLT (BUY, fair value S$1.12) and AREIT (HOLD, fair value S$2.18) are most likely to meet growth expectation. We are also upgrading the sector rating to OVERWEIGHT from UNDERWEIGHT.
posted by SmartYInvestor at 8:04 AM
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