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Singapore REITs retain favor despite rising rates

REITs in sectors such as hotels and industrial properties likely to perform better

People walk past the skyline of Marina Bay central business district in Singapore.   © Reuters

SINGAPORE (Nikkei Markets) -- Singapore's real estate investment trusts are seen offering some of the best opportunities in the local stock market despite rising interest rates, although ratings agency Moody's warns that debt-funded acquisitions and redevelopment projects could raise leverage and risks going into 2018.

As a group, REITs have underperformed the stock market this year, rising by around 17% on average since January compared with the benchmark Straits Times Index's gain of 19% as investors chased growth stocks such as banks, developers and technology stocks.

However, Singapore REITs remain attractive investments thanks to dividend yields of around 5.8% that are higher than those offered by REITs in other major markets such as Hong Kong and Australia.

In all, there are a little over 30 REITs listed on the Singapore Exchange. Their popularity with income-seeking investors has spiralled over the past decade even as interest rates have declined. Besides reasonably steady dividends, which are paid out of the rental income that the REITs get from their real-estate assets, the group also offers investors exposure to a wide range of sectors ranging from retail to hospitality and healthcare.

Although the city-state's sluggish economy in recent years has damped their performance somewhat, RHB Securities believes that REITs that invest in industrial properties and hotels are likely to increase their distribution per unit, or DPU, next year. The brokerage, which has an overweight on the Singapore REIT sector, cites the recovery in the city-state's trade and tourism and a slowdown in new supply of hotels and industrial space as factors.

"We believe investor attention would now turn to REITs, which are likely to benefit from the current economic growth cycle and deliver DPU growth," it said in a report.

RHB estimates that just 400,000 square feet of business park space will come onto the Singapore market in 2018, down from the 10-year average of 1.4 million square feet per annum. The new supply of factories and warehouses will remain relatively strong at 2.1% in 2018 before falling sharply in 2019.

That, coupled with strong manufacturing and exports data over the past year, should result in higher rentals from the second half of 2018, giving life to industrial REITs such as Ascendas Real Estate Investment Trust.

As for hotel REITs, RHB believes room rates are poised to recover by 3-7% in 2018 after falling some 12% from their peak in 2012 due to the surge in new entrants to the hospitality market.

The brokerage estimates that supply of new rooms will rise by 1.7% in 2018 and 1.9% in 2019, following an increase of 4.0% in 2017. In contrast, visitor arrivals will likely grow by 4-7% in 2018.

"We expect hoteliers to regain some of the pricing power," RHB said. Its top picks in the sector are OUE Hospitality Trust, which is linked to Indonesia's Lippo Group, and CDL Hospitality Trust, which is managed by a unit of City Developments' U.K.-listed hotel arm Millennium & Copthorne.

According to data from the Singapore Tourism Board, visitor arrivals rose 5.1% to 13.1 million in the year to September, thanks to a jump in tourists from China and India.

However, while analysts are bullish about industrial and hospitality REITs, they are less certain about other sectors.

While low yields of office REITs are justified by a turn in the office cycle, "rich valuations today could cap upside and investors should await a better entry point," Maybank Kim Eng said in a report this week.

Office REITs have been amongst the best performers in the Singapore market this year, with CapitaLand Commercial Trust, Singapore's largest office landlord, returning around 40% this year. CapitaLand Commercial Trust is managed by a unit of CapitaLand, Southeast Asia's largest developer.

Analysts are also wary about shopping malls, given the potential disruption from the rise of e-commerce.

Moody's warns that the risks for all REITs are likely to increase with debt levels set to rise over the coming months.

The ratings agency said in a report this week that it expects the financial profiles of the 15 rated Singapore REITs to remain weak over the next 12-18 months as the trusts make acquisitions and revamp their portfolios through redevelopments in search of higher yields.

Singapore REITs are required to pay out at least 90% of income as dividends to enjoy preferential tax incentives, leaving the trusts with little cash reserves to help fund new purchases. While REITs can also raise new equity, Moody's expects the bulk of the investments will be funded by debt because of the current low interest rate environment.

However, the agency expects the increased debt levels to be partially mitigated by the trusts' high proportion of fixed-rate debt, which accounts for more than half of total debt, as well as moderate refinancing requirements below 20% in the next 12-15 months.

It added that the Singapore REITs it rates currently have leverage ratios under 40%, which is well below the regulatory threshold of 45% of asset value.

While this ratio could weaken given the REITs' appetite for growth, none was expected to breach the 45% level, it said.

--Kevin Lim

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