Singapore Reits

OSK DMG Research on 17 Sept 2012

Since the beginning of the year, the Straits Times Reit Index has risen by 25.1 per cent, outperforming the STI (+12.5 per cent year to date). Going forward, as the Singapore dollar continues to remain strong, coupled with volatility in the global market and negative real interest rates (after taking inflation into consideration), we expect Reits as a sector to remain positive for the rest of FY2012.

Given a possible recovery in market sentiment on the back of quantitative easings from various countries, we believe this is a good opportunity to invest in office and hospitality Reits while taking profit on Reits in the retail space. We continue to maintain "overweight" on the Reits space on the back of prolonged low interest rates; with our top pick in CapitaCommercial Trust ("buy", TP $1.50) and CDL Hospitality Trusts ("buy", TP S$2.20).

Although it was demonstrated that Reits' distributable incomes remained resilient when the economy slows down, this defensiveness does not necessarily translate to a stable DPU to unitholders. Furthermore, two issues that were identified to significantly affect the performance of Reits and the dividend being paid out: rights issues and corporate governance, with the latter issue potentially leading to long term damage to unit-holders' values.

In our study, we have further identified integrated office and hospitality Reits to be closer correlated to the recovery of the economy as compared to Reits in the industrial and retail sectors. More importantly, we further noted that Reits as a group tend to outperform the STI when there are no clear indications of the direction of the market.

Currently, given the strong fundamentals of Reits, we continue to maintain "overweight" on this sector with our top pick in CapitaCommercial Trust and CDL Hospitality Trust due to their close correlation to the market and being well-positioned to ride on the market rally. Although there are no changes to the ratings of the counters under our coverage, given a stellar performance of Frasers Centrepoint Trust (FCT) and CapitaMall Trust (CMT) year to date, together with increasing possibility of the market moving into Reits with higher growth potential as market sentiment picks up, we believe the share prices of CMT and FCT would grow at a slower pace than their peers going forward.

Due to this reason we believe this is a good time to lock in earnings and take some money off the table on these counters.
OVERWEIGHT