Singapore Reits

MAYBANK KIM ENG RESEARCH, June 6

WE expect the current "QE-inflated growth" to run out of steam in the months ahead and S-Reit prices will continue to rationalise. Our regional economics team expects that QE will persist through 2013. However, the fact that Federal Reserve chairman Ben Bernanke's mere hint of QE tapering on May 22 had driven the S-Reits down by 9.4 per cent by June 3, showed how jittery investors have become about yield plays. While some will find S-Reits to be still attractive, we believe fears of impending stimulus withdrawal and rate hikes overhang will cap further upside.

We downgrade it to "underweight" and switch to developers (prefer CapitaLand, Keppel Land, CMA and Wing Tai). For those who must be in S-Reits, we prefer the retail Reits (Suntec Reit, CapitaMall Trust and StarHill Global Reit).

In this economic climate, we believe S-Reits' trading will get more volatile. In terms of trough valuations, we benchmarked against average yield spreads of S-Reits with the highest FY13 street estimate for SG government 10-year bond of 2.25 per cent. If risk-free rate rises to that level, the downside risk to S-Reits will be a fall in prices - down 10 per cent from current levels and most severe for office Reits (-11 per cent), followed by industrial (-5 per cent) and then retail (-2 per cent).

This assumes negligible DPU growth, which is modest for S-Reits in FY 2013 (sub-par 7 per cent from 10 per cent in FY 2012).

We witnessed, during the global financial crisis, S-Reits' resilience as an attractive asset class to park funds in the absence of viable alternatives. As long as positive carry is maintained, the recurring distributions compensate investors for any fall in price or/and other expenses. At this nascent stage of global recovery, we believe that some investors will still view S-Reits as a yield play, driven by continued liquidity.

However, the impending stimulus withdrawal and rate hikes overhang are likely to cap further upside. Our preference are only for retail Reits where

• downside risk to rate hike of 2.25 per cent is lowest;
• FY 2013 DPU growth is most favourable; and
• the mismatch between rentals and physical prices has also not proved unnerving compared to other sectors.

UNDERWEIGHT