REITs still viewed as attractive investments

REITs still viewed as attractive investments
By Lynda Hong | Posted: 12 November 2012 2345 hrs
     
SINGAPORE : Singapore Real Estate Investment Trusts (S-REITs) have outperformed the STI significantly as at end-October this year.

And some investors are expecting the good run to continue, driven by capital inflows from stimulus measures in the US.

But some analysts warn that the performance of S-REITs may have peaked.

Market volatility and economic uncertainties are expected to continue to drive demand for REITS which are seen to be less risky and provide steady returns at the same time.

According to OCBC Investment Research, the FTSE ST REIT Index has outperformed the STI by 11 percent since September 13.

That's when US Federal Reserve announced the third round of quantitative easing (QE3).

Prior to the Fed announcement, analysts say the FTSE ST REIT Index was six percent higher than the STI since the beginning of 2012.

Eli Lee, Investment analyst, OCBC Investment Research, said: "QE3 has brought about a greater magnitude to a present trend we are seeing today. The yield for the sector is still very attractive at 6.1 percent. And also on a relative basis to say 10-year Treasury yields. The unique thing is that S-REITs have a very attractive spread relative to our 10-year government yield rates, hovering above 450 to 470 basis points, which is a significantly larger spread to other similar markets like Hong Kong or Japan."

Analysts expect the Federal Reserve to press on with its efforts to spur growth in the US by keeping a loose monetary policy.

And that could see more capital inflows into both REITs and the property market in Singapore.

In fact, a recent survey conducted by the Real Estate Developers' Association of Singapore showed that nearly 7 in 10 respondents believe more funds will flow into REITS as a result of QE3.

But analysts say performance of REITS may have peaked as higher share prices continue to compress yields.

They add that rising construction costs and property prices also make it harder for REIT managers to look for ways to grow.

Roger Tan, CEO of SIAS Research, said: "REITs have enjoyed good times in 2012, it may just be a stable dividend yield, stable capital gain. (In 2013) probably zero capital gain or small capital gain, considering their ability to generate more or higher revenues and (with) M&A activities now a lot lower. So I think investors may flow funds into physical property instead of the REITs itself."

Still, analysts say S-REITS present an attractive investment proposition with average yields of 5 to 6 percent compared to other investments.

In a report out last month, Credit Suisse said within the S-REIT space, retail REITs have the most resilient fundamentals as their rentals and occupancies tend to hold up better than those in the industrial segment.

- CNA/ch