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Nikkei Markets

Predictable Singapore REITs increase appeal amid uncertainty

Signs of dovishness from Fed bolster investor interest

CapitaLand Mall Trust and CapitaLand Commercial Trust are widely regarded as safe bets.   © Reuters

SINGAPORE (Nikkei Markets) -- As market uncertainty increases, Singapore-listed real estate investment trusts are emerging as safe havens for equity investors due to their low debt levels and steady cash flow that allow them to maintain their relatively high dividends.

Signs that the U.S. Federal Reserve could slow the pace of future rate increases and the Singapore dollar's strength relative to most regional currencies have also shored up confidence in the sector.

REITs are property funds that pay regular dividends from the rents they receive. As a group, they tend to find favor with investors who prioritize regular income over share-price growth.

The Singapore REIT sector, one of Asia's largest with a total market capitalization of 86.2 billion Singapore dollars ($63 billion), offers investors exposure to a wide range of underlying real estate assets from shopping malls in Singapore and China to office buildings in the U.S. and Europe.

Although interest in REITs has been damped in the past few months by the prospect of higher interest rates, which could mean their yields become less appealing when compared to fixed-income investments such as bonds, sentiment is turning.

Investment advisers and stock brokers have been advising clients to stick to companies with stable earnings and strong balance sheets as geopolitical factors darken the economic outlook. Not only has the trade war between the U.S. and China grown rancorous, problems are also mounting in Europe with Britain struggling to find a way to withdraw from the European Union.

According to research from the Singapore Exchange, there was a net inflow of S$28.1 million from institutional investors into the sector in November, reversing three consecutive months of net outflows.

"In an environment like this, we go back to our core investment philosophy and look for cash flows that are predictable with visible cash return to investors," Singapore-based River Valley Asset Management said on a note on Wednesday highlighting Cromwell European REIT, one of the 39 property trusts listed in Singapore.

Malaysian stockbroker RHB said its recent meetings in Bangkok showed that fund managers in the Thai capital were generally positive about Singapore REITs, thanks in part to recent dovish statements by the U.S. Fed.

Current valuations do not look expensive to investors, with the Singapore REIT sector offering an average yield 6.2% and a premium of 4 percentage points over government bonds, which are among the highest in the world, RHB analyst Vijay Natarajan said in a report this week.

Yields on Singapore-listed REITs range from as little as 5% a year in the case of CapitaLand Mall Trust and CapitaLand Commercial Trust to nearly 13% in the case of Lippo Malls Indonesia Retail Trust, whose assets are in Indonesia.

CapitaLand Mall Trust and CapitaLand Commercial Trust are widely regarded as safe bets because their properties are in Singapore while CapitaLand, their manager and sponsor, is one of the biggest companies under state-backed Temasek Holdings.

OCBC Investment Research, the research arm of lender Oversea-Chinese Banking Corp., said REITs in the city-state had an average leverage ratio of 35.1% as at end September, meaning the value of their assets is well above their debt. About three quarters of borrowings by the sector had been hedged against sharp currency or interest rate movements, OCBC said.

RHB's top picks among Singapore-listed REITs include Ascendas REIT, which owns industrial properties and warehouses, CDL Hospitality Trust, which has hotels in various countries, and Starhill Global REIT, whose main assets are stakes in two malls along Singapore's Orchard Road shopping belt.

OCBC's preferred picks include Mapletree North Asia Commercial Trust, which owns properties in Hong Kong, China and Japan, Keppel DC REIT, which owns data centers, and Frasers Centrepoint Trust, which owns malls in Singapore.

--Kevin Lim

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