SINGAPORE (Nikkei Markets) -- Singapore-listed real estate investment trusts have risen around 20% since the start of the year, prompting fears that they have become too expensive.
But recent measures have added to their appeal for many analysts who continue to have a buy on these assets. Not only are their yields well above those of high-quality government bonds, there is now a greater chance of REITs buying new assets, which could boost valuations.
Much of the recent debate about Singapore REITs has centered on their valuations and growth prospects after the Monetary Authority of Singapore said it was considering raising the borrowing limit for REITs to 50-55% of asset value from the current 45%. The move was aimed at helping Singapore REITs to better compete with their foreign counterparts and with private equity funds in bidding for new assets.
The increase could potentially spur acquisitions by REITs and raise distribution levels since borrowing costs are typically lower than the rents collected from tenants.
Interest rates are also expected to fall in coming months as central banks loosen monetary policy to spur economic growth.
Morgan Stanley said the higher gearing limits would be a net positive for Singapore REITs and could raise the distribution per unit by 2-5%.
REITs, which are categorised as equity, have bond-like qualities as they make regular payments to investors from the rents they collect. They are an important sector for the Singapore Exchange as they have a combined market value of over 100 billion Singapore dollars ($73.7 billion) and account for about one-tenth of the total market capitalization of listed stocks.
According to SGX's iEdge S-REIT Index, REITs in the city-state have risen by 19.6% since the start of the year, beating the 8.9% rise in the benchmark Straits Times Index over the same period. REITs were also the most popular sector among institutional investors, drawing net inflows of S$396.3 million in the first six months of 2019, SGX said.
DBS Private Bank continues to recommend Singapore REITs as they are relatively safe income-generating instruments whose yields of 5-6% per annum are higher than those of REITs listed in other markets like the U.S., Japan, Hong Kong and Australia.
By contrast, yields of investment-grade bonds have fallen to unattractive levels. Some high-quality issues such as those from the German government and French luxury giant LVMH offer negative interest rates, which mean investors pay for the privilege of owning the securities without receiving an interest.
Negative-yielding bonds now make up around 20% of the global investment-grade universe, while those offering annual returns of 2% or less account for half the available stock, chief investment officer Hou Wey Fook said at a briefing last week.
In terms of asset allocation, DBS Private Bank advocates a "barbell strategy," whereby one end is dominated by companies that are plugged into secular growth themes such as cloud computing and sustainability while the other end comprises REITs, high dividend paying blue-chip companies and bonds.
Stockbroking firm CGS CIMB, which has an overweight rating on Singapore REITs, added that their high valuations are supported by the benign interest rate environment, which lowers the cost of servicing the loans on high-priced assets like malls and office buildings.
But even among those who like the asset class, the valuations of some of the larger REITs are becoming a concern.
For instance, CapitaLand Commercial Trust, CapitaLand Mall Trust and Ascendas REIT, which are all managed by CapitaLand, are already trading at more than 1.2 times the value of their assets after subtracting debt. The ratio is high as REITs tend to trade around book value.
Other REITs that trade at a fairly large premium to book value include Mapletree Commercial Trust and Frasers Centrepoint Trust, according to a weekly REIT tracker published by OCBC Investment Research.
OCBC has a neutral outlook on REITs, alongside players such as KGI Securities and UBS's private bank.
Gabriel Yap, executive chairman of investment firm GCP Global, said analysts who have been calling for a sell on REITs are making the mistake of only looking at historical valuations and ignoring other factors such as interest rate trends and the impact of new acquisitions.
"We don't just look at academic parameters to make judgement calls... Upcoming interest rate cuts and current demand-supply dynamics are supportive of S-REITs valuations," he said.