Singapore Reits

DMG & Partners Research on 26 June 2013

THE Singapore Reit (S-Reit) market has remained volatile as concerns over US monetary policies continue to spook the market.

Over the last one and half months, the FTSE Straits Times Real Estate Investment Trust Index (FSTREI) has corrected by about 16.8 per cent from its peak while the long-term yield curve has spiked up steeply.

We expect bond yields to stabilise at this level while remaining prudent on the S-Reit market due to the potential of rising debt costs.

Bond yields rise over the last one and half month. Over the last 45 days, the S-Reit market has pulled back by about 16.8 per cent, as yield spreads were compressed on the back of the recent spike in Singapore 10-year government bond yields.

As the global market remains concerned over the unwinding of the quantitative easing (QE) programme in the US, bond yields have risen from 1.4 per cent on April 30 to 2.4 per cent on June 21 (+71 per cent) during this period.

S-Reits are sold off as 10-year Treasury yields rise. Following the recent increase in Singapore 10-year Treasury bond yields, investors seeking to compensate for the compression in the spread between dividend and bond yields have sold off S-Reits.

Prior to the correction that began in the beginning of May, the yield spread between the S-Reits and the 10-year Treasury bond yields stood at 381 basis points. Although the FSTREI has corrected by 16.8 per cent since then, the spread between S-Reit yields and bond yields stood at 356 basis points on June 21, an indication the sector is not any more attractive than it was prior to the correction.

We lower our target prices for the Reits we cover by 11-21 per cent and raise our risk-free rate assumptions by 90 basis points to better reflect the effect of the rise in 10-year Treasury bond yields. At the same time we also assumed a hike in interest rate by 50 basis points each year from 2014-16.

Despite paring down our target prices, we maintain our "neutral" rating on the S-Reit sector. In the short term, some Reits such as A-Reit (currently trading at 6.7 per cent FY2013 forecasted yield) may experience some rebound from the recent sell-off as we believe that Treasury bond yields will settle at around 2.5 per cent.

However, we continue to remain prudent on S-Reits in the long run as we continue to see a flattish outlook in the rental market at this juncture, versus the rising risk of higher interest rates.

Sector - NEUTRAL