Don’t be Fooled By Lackluster IPOs, Singapore REITs Still Attractive: Analysts

Singapore has been attracting some large IPOs from Real Estate Investment Trusts (REITs) lately, but unfortunately for investors, the new listings haven’t dazzled on their debut.

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The latest issue, Mapletree Commercial Trust, listed at S$ 0.88 on Wednesday, but ended the first day relatively flat. That follows the March listing of Hutchison Port Holdings Trust, which fell short of expectations amid unfavorable market conditions.

But some analysts are still bullish on the overall S-REIT space. Derek Tan, analyst at DBS Vickers expects some blue chip S-REITs to continue doing well, backed by increasing earnings, and opportunities to grow their portfolios.

On average, S-REITs offer yields of between 4 percent and 6 percent, in addition to capital appreciation.

Tan estimates that S-REITs will deliver market cap weighted total returns of 16 percent for the next 12 months.

"But with high inflation and a potential interest rate hike on the horizon, it's important to be selective. We recommend investors focus on REITs that can deliver growth, whose yields are unlikely to be eroded by inflation," says Tan.

A tool to beat inflation

Tan is most upbeat on hospitality and shopping mall REITs. He’s forecasting the distribution per unit (DPU) or income paid to investors of such stocks will post a compounded annual growth rate (CAGR) of 5.5 to 9.2 percent over 2011-2012.

"That makes them a good hedge against inflation in Singapore, which is likely to average at 4.2 percent this year."

Tan's top pick include Parkway Life, one of Asia's largest listed healthcare REITs, and the top performing S-REIT in the past 12 months, with total returns of nearly 30 percent.

He's also bullish on CDL Hospitality Trusts, Singapore's largest hotel owner and Fraser Centrepoint Trust, a REIT that operates suburban malls.

Ong Kian Lin, an analyst at OCBC Investment Research agrees that S-REITs are attractive investments as their rental and capital values appreciate in tandem with inflation.

But he's more optimistic about office REITs in Singapore. According to him, rental rates fell so much during the financial crisis that they have a greater potential to catch up in the current recovery cycle.

"We think Grade A office rents will hit at least S$10.50 psf (Per square feet) in 2011, compared to S$11 in 2012, and S$12 in 2013. This works out to a CAGR of at least 7 percent. Assuming these get passed down to unit holders, add existing distribution yields of 5-6 percent to that and we are looking at total returns of at least 12-13 percent for the year ahead."

He’s bullish on CapitaCommercial Trust. “With its near 100 percent occupancy and track record of active leasing, we believe that CCT is poised to benefit from any potential rental upside,” says Ong.

Disclosures: Ong Kian Lin and OCBC do not have any holdings in Parkway Life, CDL and Fraser Centrepoint. Derek Tan and DBS do not have any holdings in CapitaCommercial Trust.