Smaller REITs more attractive on price-to-book ratio: analysts

Singapore’s real estate investment trusts (REITs) have risen more than 140 per cent since March 2009 and their value could go up by another 60 per cent, according to analysts.

REITs are currently offering juicy yields, which may start looking less attractive to investors when Singapore government bond yields start to climb higher.

Even then, analysts said there still are some standout performers among REITs that are offering value at current prices.

Singapore REITs are gearing up to acquire more properties.

Leverage ratios – which measure how indebted a REIT is in relation to its assets – have continued to fall this year.

Leverage is now at an average 28 per cent. This shows the REITs are well capitalised and in a better position to buy new properties with debt.

Loy Wee Khim, associate director, Corporate & Infrastructure Ratings, Standard & Poor’s, said: “Most of the REITs are also thinking of where they are coming from – a low position because of the recapitalisation during the downturn.

“I think they are ready to acquire new assets to enhance their portfolio, so we find that most of them have the appetite to increase their gearing to below 40 per cent or 40 per cent level.”

But OCBC Research said valuations of some REITs are now a tad too rich.

OCBC analysts said investors should shy away from the bigger REITs that are trading at premiums to their book value and focus on some of the smaller ones which are trading at a discount.

Meenal Kumar, an investment analyst at OCBC Investment Research, said: “From the perspective of long-term investors, we’re actually calling to avoid the first tier large-cap REITs and instead, focus on what we call the forgotten, but still credible REITs.

“And by credible, I mean strong balance sheets, strong sponsors and of course importantly, high absolute yields. And also they should be trading at most, at parity to book value, but ideally at a discount to book value. And in terms of some of our top picks, we like Starhill Global REIT and Ascott Residence Trust.”

Similarly, CIMB has recommended smaller REITs in the industrial space, such as Cache Logistics, as bigger players such as A-REIT are trading at a 30 per cent premium to book value.

Source : Channel NewsAsia – 25 Oct 2010

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