Real Estate Investment Trusts

Maybank Kim Eng Research, Sept 2

SINGAPORE real estate investment trusts (S-Reits) are currently trading at FY2013 forecast yields of 6.6 per cent, above its historical average of 6.3 per cent. While yields appear attractive, we think it is still early to enter the market at this juncture.

We expect further volatility in the bond market, especially with several macroeconomic uncertainties facing the United States and the global economy as we head into September, namely: (1) possible quantitative easing tapering during the upcoming Federal Open Market Committee meeting on Sept 17-18, (2) budget debate in Washington, (3) Germany election, and (4) imminent US strike on Syria.

Market overhang now lies with impending hikes in interest rates and the possible recalibration of over-inflated property prices - which can drag down NAV. In terms of sector trough valuations, we will advise investors to relook at the S-Reits space at distribution-per-unit yields of 7 per cent and above on average for the sector. This is pegged to a historical yield spread of 380 basis points and longer-term risk-free rate of 3.0-3.5 per cent (currently 2.7 per cent).

This implies further price downside of at least 7 per cent. Maintain "underweight" on the overall sector.

Sector - UNDERWEIGHT