Singapore Reits for volatile markets

Singapore Real Estate Investment Trusts (S-Reits) suffered like many other asset classes during the worst of the crisis last year. But according to Eng Seat Moey, managing director and head of asset-backed securities at DBS, they now offer opportunities for at least two different types of investor objectives: stability for those who want a reliable income, and growth for those who want capital gains.

"Reits have the characteristics of a safe, high-yielding share -- or even a fixed-income security -- and also potential for the capital appreciation of a growth stock," said Eng.

The dividend payout is stable and predictable, with 90%-100% of cash flow generated from rents distributed to investors. There are also strong possibilities for price gains.

In part, the opportunities come from a collapse in prices after the failure of Lehman Brothers in September 2008. During 2007 and into 2008, S-Reits were trading at an average premium to net asset value (NAV) of 40% to 50%. But premiums rapidly disintegrated into discounts in the crisis months last year. At one point the average discount to NAV even exceeded 50%. 

Valuations have since recovered significantly, but are still cheap compared with pre-financial crisis levels. Some are still trading at a discount to NAV of 20% to 30%. And average yields are now 6% to 7%, compared to pre-crisis levels of 5% to 6%, suggesting more price appreciation potential.

Ironically, the quality of many S-Reits improved as an indirect consequence of credit desiccation. In late 2008 and in 2009, sources of debt financing dried up, as the European MBS (mortgage-backed securities) market for secured long-term borrowing imploded, and banks withheld credit lines. S-Reit yields rose as high as 20%.

So, the S-Reits responded by raising a combined S$5 billion ($3.6 billion) of equity capital last year, including nine rights issues that raised about S$4 billion. DBS was the sole financial adviser for a milestone S$1.23 billion rights issue by CapitaMall Trust in February 2009, the first recapitalisation in the S-Reit sector since the Lehman Brothers collapse, and also the largest equity fundraising by an S-Reit to date.

Its success helped pave the way for other deals. These included fundraisings by CapitaCommercial Trust, Starhill Global Reit, Fortune Reit, Frasers Commercial Trust, CitySpring Infrastructure Trust and Ascendas Reit -- all of which were lead-managed by DBS. No surprise then, that DBS ranked first in the sector with a 29% market share in 2009.

The result of that balance sheet cleansing is that gearing levels have fallen to an average of around 30%. Although gearing levels are generally capped at 35% for Singapore-listed Reits, trusts that have an official credit rating are allowed to leverage up to 60%.

"The important point is that all residual refinancing issues and difficulties caused by the global credit crisis have now been resolved," said Eng.

Equally positive for the market was that the property sector itself held up well, and that there was no fire sale, even among the smaller Reits.

According to Eng, "both institutional investors and wealthy individuals are attracted by the Reit business model and reassured by the high-quality corporate governance inherent in the structure".

An S-Reit's investment strategy can be changed only after approval at an extraordinary general meeting or after three years from the listing date by giving notice to trustees and unit-holders. The eligibility of its investments is also tightly defined, and the Reit normally aims to fix its debt funding for three to five years in order to match the tenors of leases for the properties in its portfolio.

But a big problem for investors keen to gain access to this asset class is that the free-float may be limited for the smaller Reits. For the larger Reits, liquidity is usually not an issue.

However, the market is still in its infancy, having opened as recently as in 2002. There are now 21 Reits quoted on the Singapore Exchange, with a combined market capitalisation of about S$29 billion.

But there are signs that the market is preparing for the next stage in its development. In the past two months, S-Reits have announced more than S$1 billion worth of acquisitions and CWT and ARA have plans to launch a logistics Reit, called Cache Logistics Trust.  

Most of the Reits in Singapore have strong sponsors who are committed to growing the market and providing an acquisition pipeline for their Reits, said Eng. These include CDL Trust, Frasers Centrepoint Trust, CMT, A-Reit, Mapletree Logistics, and Ascott Residential Trust, among others

"Although performances may vary from sector to sector, the inherent characteristics of Reit vehicles make them an ideal investment option, especially in view of recent market volatility," concluded Eng.