Local Reits register solid returns for 2014, News, News, AsiaOne Business News

Local Reits register solid returns for 2014, News, News, AsiaOne Business News:

Grace Leong

The Straits Times

Monday, Dec 29, 2014

2014 has been a relatively solid year for the local real estate investment trust (Reit) sector, although prospects of higher interest rates next year could result in more volatility in Reit unit prices.



The 28 Reits listed here have a total market value of $59.7 billion and averaged year-to-date total returns of 12.9 per cent.



Indicative dividend yields averaged 6.1 per cent, according to a report by SGX My Gateway on Wednesday. The Reits also have posted an average price gain of 6.3 per cent so far this year, the report said.



A year ago, the 25 Reits listed had a total market value of $50.5 billion, while indicative dividend yields averaged 6.1 per cent.



The FTSE ST Reits Index, which tracks 33 local trusts, has had total returns of nearly 16 per cent so far this year, outperforming the Straits Times Index's 7 per cent gain. This compares with a drop of 4.5 per cent a year ago.



Despite the US Federal Reserve's dovish stance on monetary policy at its meeting last week, a hike in the Fed Funds target rate is expected by the second quarter of next year. "This would likely influence the Singapore Government 10-year bond yield and Sibor to increase, and could result in volatility in the share prices of S-Reits," OCBC Investment Research noted in a report last week.



But most Reits have buffered up their balance sheets to keep gearing ratios at relatively comfortable levels, and have also put in place hedging strategies, OCBC said.



Trusts here have been tightening their belts on expectations that interest rates could rise over the next few years, which would have major repercussions as borrowing costs are a major component of their expenses.



While the brokerage has maintained a neutral call on the sector, it is overweight on office and retail Reits. It has buy calls on CapitaMall Trust, Frasers Centrepoint Trust and Starhill Global Reit.



Reits are popular among investors as they can offer higher yields than regular property stocks through tax-exempt dividends and a requirement to distribute at least 90 per cent of taxable net income to unitholders.



MayBank Kim Eng, which has a buy call on CapitaCommercial Trust (CCT), cited "23 per cent of pre-commitment leases signed to date for CapitaGreen, and GIC renewing leases at Capital Tower next year with significant rental reversion".



"GIC (CCT's top 10 tenant contributing 5 per cent of monthly gross rental income) will be renewing its leases at Capital Tower next year, with significant reversion, given its low base, according to management. CCT stands to benefit from higher office spot rents given its favourable lease expiry profile," the brokerage said.



It also said CCT's balance sheet remained strong, "with a low gearing of 28 per cent, and 80 per cent of borrowings are on fixed rates".



Its portfolio occupancy also remains strong at 99.4 per cent.



Meanwhile, OCBC downgraded its call on Suntec Reit to a "hold", saying it is expected to be "a beneficiary of the robust momentum in Singapore's prime office sector, although rental growth is likely to moderate from 2015".



"The momentum for prime office space in Singapore remains robust, as illustrated by the 3.3 per cent quarter-on-quarter and 14.7 per cent year-on-year increase in grade A rentals in third quarter 2014, based on data from CBRE.



"Notwithstanding this positive environment, we believe the pace of rental increase would moderate next year. Growth is expected to ease further in 2016, given the large pipeline of supply coming on stream," the brokerage said.



"The situation appears less sanguine for Suntec Reit's retail segment which, in our view, is underpinned by headwinds facing Singapore's retail sector. This has resulted in the relatively lacklustre committed occupancy rate of 60 per cent (as at Sept 30) for Suntec City Mall's Phase 3 development. We see downside risks to our full year 2015 gross revenue and distribution per unit forecasts if the situation remains sluggish," it said.

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