S-REITS remain attractive investments despite gloomy outlook

Prices of Singapore Real Estate Investment Trusts, or S-REITs, have declined some 20 per cent year to-date from its peak in May as fears over rising interest rates dampened investor interest in this sector.

However, some analysts say interest in the sector will return once S-REITS prove that they can mitigate rate risks.

S-REITs have taken a hit since the US Federal Reserve hinted that it may start rolling back its bond-purchase program, known as quantitative easing, or QE.

The FTSE ST REIT Index, which tracks the performance of Singapore-listed REIT, tumbled some 20 per cent from its peak in May.

A report released on December 3 by the Monetary Authority of Singapore warned that higher interest rates could lower REIT dividends, in turn reducing payouts, and therefore, investment appeal.

With that, some analysts say REIT investors will be demanding higher required rates of return, putting downward pressure on prices.

But some analysts say some REITs will be more resilient than others in the rising interest rate environment.

Education business consultant Desmond Chua from CMC Markets, said: “The risk of higher interest rates tend to drive up higher interest expense, which would see a falloff in the yields. And especially as we know, REITs deliver more than 90 per cent of their profits through yields, so with a fall in yields, we tend to think that REITs are less favoured.

“That said, different REITs perform differently and we have to look into the nature of that sector. In an industrial and commercial space, we tend to think that REITs tend to be more affected because higher interest rate tends to drive yields lower as they tend to have a higher locked in period. However, in the hospitality space, REITs are of lower tenure so they have higher pricing flexibility.”

While concerns have been raised over refinancing risks, experts say that REITs can reduce leverage by issuing shares.

Roger Tan, CEO of Voyage Research, said:” Some say that with increased interest rate, it will affect the borrowing cost of the REIT but when interest rate goes up, we’re talking also about inflationary pressure and issues. Most REITs that renew their rental can also increase their rental rate so it kind of offsets the increase in interest rates. ”

Going forward, some analysts say REITs remain an attractive investment option amid recent property cooling measures.

And they have the potential to continue delivering high income distributions by exploring high growth markets overseas.

Source : Channel NewsAsia – 4 Dec 2013

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