Published on Mar 15, 2014
Their high-yield returns appeal to investors as interest rates stay low
By Goh Eng Yeow Senior correspondent
REKINDLING a love affair can be a tall order when the attraction fades, so analysts deserve some kudos for trying to reawaken the passion investors once felt for real estate investment trusts (Reits).
Their rationale is simple: Reits offer investors an attractive high-yield return when compared with the measly sub-zero interest rates which banks pay savers for their deposits.
Interest rates are unlikely to rise any time soon, even with the efforts of the US Federal Reserve and other central banks to rein in liquidity.
Investors are therefore looking for high-yield assets in which to park their cash again.
One gauge of their growing appetite for risk is the boom taking place in the corporate bond market. Issues such as the recent $200 million five-year bond sold by Amtek Engineering, offering a yield of 6.9 per cent, were snapped up.
The performance of the FTSE ST Reits Index also tells the story of a slow recovery.
At the start of January, it stood at 714. It then fell to a low of 691.63 on Feb 5, as emerging market jitters rocked the local bourse, before climbing back to the same 714 level last week.
Yesterday, it ended 0.65 point down at 712.82.
For many Reits, it is essentially the same story: CapitaMall Trust started the year at $1.905 and sank to as low as $1.81 on Feb 17. It then clawed back its losses, ending flat at $1.895 yesterday.
But Barclays Equity Research analyst Tricia Song said in a note that local Reits are poised for more gains as they play catch-up with Reits elsewhere.
"Singapore Reits offer the best forward yield spreads of 4.8 per cent, compared with Reit peers in Japan which offer 3.3 per cent, US ones at 1.8 per cent, and Hong Kong ones at 2.6 per cent."
Also, local Reits are offering yields of between 0.9 percentage point and three percentage points above their historic averages. "This suggests potential outperformance versus the Straits Times Index in the next three years," she added.
Ms Song had another interesting observation: In the United States, there were six periods in the past 20 years when Reits suffered sharp corrections because of interest rate hikes.
Such corrections were subsequently followed by "periods of strong absolute returns, with the Reits outperforming widely watched market indexes such as the S&P 500", she said.
Given the strong correlation between local Reits and US ones, she believes that the US experience may be repeated in Singapore.
For some analysts, however, the big question is where Reits will get their growth from here on as growth was the big driving factor behind their price surge in recent years.
Goldman Sachs said in a note: "We see rising rates as largely priced in, and we expect investors to focus on the importance of growth fundamentals during the next phase of the market cycle."
In the past 10 years, the catalyst driving the Reits' unit prices higher was acquisitions as they built their property portfolios. But the focus is likely to shift to "topline growth and cost controls" in order to grow revenues. This is because "acquisition-led growth will pose a challenge to Reits, as the cost of their equity goes up with rising interest rates".
engyeow@sph.com.sg
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