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This year has been very good to Singapore real estate investment trusts (S-Reits) such that some entities are beginning to wonder whether the upside will last much longer.
In fact, several brokerages have moved away from their “buy” calls made earlier this year, reported The Business Times.
UBS described S-Reits as “rather pricey” in its 2020 outlook. CGS-CIMB, in its November 2019 report, placed the sector at “neutral”, citing diminishing prospects following the US Federal Reserve’s signalling of a possible end to further rate cuts.
The sector now trades at a 5.5% yield, which is a 370 basis-point spread against the 1.8% 10-year bond yield. It is also around 1.15 times net asset value, which is now at +1 standard deviation of the five-year historical average, and nearer to the last peak of 1.2 times during 2013.
Sat Duhra, Janus Henderson co-portfolio manager of Asian dividend income, said global macro uncertainty has pushed investors to defensive yield instruments, such as Reits, for a majority of the year.
“If you had asked me at the start of this year, I would have said ‘Defensives all the way’, but there has been some compression on the yield, so they are less attractive now.”
He also noted that investors were probably unprepared for the about-turn after the US Federal Reserve changed its direction to cut interest rates in July, a first in more than ten years.
“Suddenly in the space of a couple of months, we had gone from a whole market believing that rates were definitely going to increase, to the idea that rates were going to fall. That’s a huge shift in sentiment and created a lot of turbulence in markets.”
This event, along with geopolitical risks such as the weaker European economy, Brexit, and the China-US trade war, gave that added lift to S-Reit prices, prompting a second round of interest in the asset class.
According to Maybank Kim Eng, S-Reits have taken advantage of prevailing low interest rates and their compressed yields to make around S$6.5 billion in acquisitions which are accretive to their net asset and distribution per unit values, despite the use of equity.
Chua Su Tye, Maybank Kim Eng analyst, said S-Reits went on an “acquisition spree” most especially in the third quarter, and utilised equity funding despite having ample debt headroom.
The largest equity fund-raising in 2019 was Ascendas Reit’s S$1.3 billion rights issue, used for purchasing 30 business parks in Singapore and the United States for around S$1.66 billion from its controlling unit holder CapitaLand.
But CGS-CIMB believes that things will slow down for S-Reits soon, with it having generated 26% returns year to date.
The company thinks that with rate cuts seen to end and upside catalysts already reflected in the compressed yield spread, the S-Reits sector will probably perform in line with the broader market in the future.
“Furthermore, with most of the anticipated deals (and equity offerings) already done, we think forward deal flow momentum could slow,” it said.
It also noted that current third-quarter results revealed the rental growth outlook remaining lukewarm in the midst of a cloudy macro environment, with office and retail still experiencing a positive rental reversion and the industrial sector still having a slight negative bias.
Maybank Kim Eng said that for industrial Reits, tenants appear to be delaying their expansion plans due to the slower recovery in rents and uncertain macro environment.
In retail, the brokerage seem to prefer suburban and large destination malls, which are believed to be more resilient to weaker tourist spending and online competition. Hospitality Reits, on the other hand, are expected to benefit from more biennale corporate events in 2020, due to it being an “even” year.
With regard to office Reits, OCBC said that they have achieved healthy rental reversions in the third quarter of 2019.
OCBC is one of those entities who remain optimistic about the S-Reits sector’s prospects, predicting a stable distribution per unit rise of 1.2% for the current financial year, and 4% for the following financial year.
This, it said, is underpinned mostly by full-year contributions from bienniale hospitality events, asset redevelopments and acquisitions.
Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this or other stories, email victorkang@propertyguru.com.sg
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