SREITs – MayBank Kim Eng

Volatility Here To Stay; Underweight


Clear and present danger. We expect the current “QE-inflated growth” to run out of steam in the months ahead and S-REIT prices will continue to rationalize. Despite our regional economics’ team’s expectations that QE will persist through 2013, the fact that Bernanke’s mere hint1 of QE tapering on 22 May had driven the S-REITs down by 9.4% by 3 Jun showed how jittery investors have become with yield plays. While some will find S-REITs to be still attractive, we believe fears of impending stimulus withdrawal and rate hikes overhang will cap further upside. Downgrade to Underweight and switch to developers (prefer CapitaLand, Keppel Land, CMA and Wing Tai). For those who must be in S-REITs, we prefer the retail REITS (Suntec REIT, CapitaMall Trust and StarHill Global REIT).


Interest rate risk rising. The SG government ten-year bond went up from 1.56% on 22 May (the day of Bernanke’s Congressional testimony) to 1.86% (30 bps) within a span of five working days, while the DPU yields of S-REITs expanded from 5.1% to 5.7% (60bps). It appears that the market was then pricing in future rate hikes of 30 bps, pending uncertainty over US exit strategy, especially since Bernanke left the door opened to both downward AND upward adjustment depending on how the economy actually does. Another risk could also be the more crowded space amongst S-REITs investors (including private wealth clients), some of whom we understand to have geared up (and thus more susceptible to interest rate hikes) for a “carry trade” on S-REITs. At this writing, the market has since narrowed DPU yields back to 5.6%, ~20bps higher than the 30bps rate hike correction.


Ample QE till September at least but… Our regional economics team believes that current ample liquidity conditions will continue till Sep 2013 at least. They expect QE3 to persist through 2013 and no rate hike in the US before 2015. The Fed is expected to continue its unprecedented USD85 billion a month bond buying (comprising USD40b in mortgage securities and USD45b in treasuries) as long as two key indicators – unemployment and core PCE (personal consumption expenditures) inflation – remain beyond the Fed’s selfimposed tolerance limits of 6.5% and 2% respectively. Nonetheless, given the forward pricing nature of markets, we believe that sporadic corrections for S-REITs are still imminent in 2H13 and take a closer look at trough valuations for FY13.


Volatility will not subside. In this economic climate, we believe SREITs’ trading will get more volatile. In terms of trough valuations, we benchmarked against average yield spreads of S-REITs with the highest FY13 street estimate for SG government ten-year bond of 2.25%. If risk-free rate rises to that level, the downside risk to S-REITs will be a fall in prices down 10% from current levels and most severe for Office REITs (-11%), followed by Industrial (-5%) and then retail (-2%). This assumes negligible DPU growth, which is modest for S-REITs in FY13 (sub-par 7% from 10% in FY12).

In SG, I believe its similar to MY.

When the company converts into a Reits holding, they have to pay out 90% of their earnings in order
that they enjoy the tax benefits. In SG, when the company does that, tax for Divs is zero.

No..thats why REits are given special status.
Otherwise why bother?

I don't have to pay any taxes on my divs whereas Msian Reits apply a 10% withholding tax on Divs

SREITs – DBSV

As the dust settles, value emerges

Rising bond yields generally negative; but S-REITs’ ability to grow distributions a compensating factor

Impact of rising bond yields more “expected than real”

Buy Growth. Picks MCT, MAGIC, FCOT and Cache


S-REITs’ ability to grow distributions to compensate for rising bond yields/interest costs a key consideration. We believe that fears of the impact of rising bond yields on S-REITs are an over-reaction at this point as our economists do not expect QE to taper off anytime soon. Over the medium term, a rise in long bond yields is likely to be more gradual than abrupt and S-REITs’ continued ability to grow distributions (estimated at 4.0% y-o-y) is a compensating factor. Thus, we believe that the knee-jerk reaction seen in the S-REITs’ share prices (FSTREI index was down 10% YTD vs STI 5% dip in the past few weeks) is unwarranted.


Impact of rising bond yields “more expected than real”. We have assessed the impact of rising bond yields on our target prices, and the conclusions are: (i) Our analysis indicates that SREIT yield spread of 3.9% based on current share prices have factored long bonds of >2.5%. Prior experience shows that SREITs trade at a 350-390 bps spread when long bonds were above 2%. (ii) Impact from higher interest costs is managable at <3%. Active capital management has resulted in most S-REITs locking in >50% of their debt costs for the next 1 – 2 years. We estimate a 0.5% increase in interest rates to have a <3% impact on distributions, which we see as managable. (iii) NAVs appear safe for now. Worries of cap rate expansion impacting S-REITs’ book values negatively are valid but we do not see it as a concern at this point. Other than for office, we note that higher valuations for S-REIT portfolios (retail, industrial sub-sectors) are underpinned by higher income, which we believe make S-REITs’


NAVs more resilient.


Translation losses a potential risk. The INR, AUD and JPY weakened 2%, 7% and 27% against the S$ respectively since the start of 2013. Thus, S-REITs with exposures in these currencies might see earnings downside and NAV declines from translation losses. From the earnings front, we note that most SREITs have taken hedges to minimize impact.


S-REITs sell-off is over-done, Selective BUYs. We have been advocating a selective stance, and limit our picks to REITs which offer growth that is achievable and visible. We like Magic (BUY, TP S$1.22), MCT (BUY, TP S$1.53), FCOT (BUY TP $1.69) and Cache (BUY, TP S$1.47) for their better than peers’ growth prospects. We have also upgraded A-REIT (BUY, TP S$2.60) and MINT (BUY, TP S$1.63) from HOLD to BUYs on valuation grounds.

They don't do their DD?

SREITS – DBSV


Price action indicates AREIT may show more resilience compared other S-REITs


US stocks ended lower and treasuries yield inched higher as concerns about QE3 continued to weigh. Investors will closely monitor the FED statement at the outcome of the FOMC meeting next Wednesday night. With triple witching


(expiration of stock index futures, stock index options & stock options) next Friday, US equity indices will be rocky, either way, over the next one week. China and HK markets re-open today.


S-REITs have been one of the worst affected in recent weeks as investors sold down yield names on concerns about QE drawdown. Recall that QE3 was announced in Sept last year. A check back on the price action shows that in line with STI’s


U-turn up, many S-REITs started to further their climb from last November as they benefited from the liquidity inflows.


S-REITs that have declined back to their respective Nov12 lows in the current correction would have effectively reversed and wiped out all the positive price action from the liquidity inflow prior to their decline. Chances are these would be


more resilient going forward compared to those that have yet to decline to their respective Nov12 levels. One SREIT that has fallen back to Nov12 level is AREIT. The stock’s Nov12 low is at $2.28. The stock undershoot that level yesterday to $2.22 but in an indication of bargain hunting, returned back to $2.30 by day’s end. Our analyst upgraded the stock to Buy earlier this week. We expect shares of AREIT to show more resilience going forward compared to other S-REITs. One


example of a S-REIT that has yet to fall to its Nov 12 low level, and thus more vulnerable to weakness, is Cambridge. The stock’s Nov12 month low was around $0.64.

3 Myths Regarding Shari’ah Compliant REITs
Perhaps you have been admiring the performance of Shari’ah Compliant REITs and been wondering why they have attracted so much attention from institutional investors. Or perhaps you have at one time considered investing in a Shari’ah Compliant REIT but a lack of understanding of the product has put you off from getting vested.


Shari'ah Compliant REITs may include properties such as technology parks such as the above, a property under the Sabana Shari'ah Compliant REIT portfolio.

Either way, this short article aims to address the most common vexations that investors have with regards to this very niche class of securitized real estate investment known as the Shari’ah Compliant REIT.

What Are Shari’ah Compliant REITs and Islamic REITs?

Don’t let the names confuse you. Depending on your locality, Shari’ah Complaint REITs may also be known as Islamic REITs but they basically mean the same thing. Shari’ah Compliant REITs are Real Estate Investment Trusts that have taken a certain level of commitment towards partaking in activities that are deemed to be acceptable according to principles of Islamic jurisprudence. This generally includes refraining from tenancy activities with businesses that handle alcoholic beverages, gambling activities and other activities considered to be not aligned with the values of Islam such as brothels and clubs.

Besides adhering to regulatory requirements imposed by the bourse in which they list, Shari’ah Compliant REITs will also need to adhere to audits that will be conducted on them by certifying bodies such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) or independent Shari’ah surveyors to certify that they are indeed Shari’ah compliant.

For the sake of brevity, we will refer to them in this article by its more commonly used term – Shari’ah Complaint REIT. Examples of prominent Shari’ah Complaint REITs in this region today include Sabana Shari’ah Compliant REIT (Singapore), Al-Aqar Healthcare REIT (Malaysia) and Al-Hadharah Boustead REIT (Malaysia).

Myth 1: Shari’ah Compliant REITs Have Limited Earning Potential Due to Islamic Restrictions.

On the contrary, Shari’ah Compliant REITs have ample track record of giving reliable dividends even during times of economic slowdown. For example during the first five months of 2013, Sabana Shari’ah Compliant REIT topped the table by beating 21 other REITs listed on the Singapore Exchange when ranked according to 12-month historical dividend distribution yields. Institutional investors such as the Malaysian-government backed Pilgrims Board Fund have also increasingly taken on more units in Shari’ah Compliant REITs such as the Al-Aqar REIT.

But why is this so?

Shari’ah Compliant REITs have mostly resorted to industrial properties and healthcare properties as the bread and butter of their respective portfolios. This is due to the fact that tenancy activities within these two clusters are at the least likely to come afoul of Islamic jurisprudence principles as compared to a retail or hotel premises where alcoholic beverages are aplenty. It so happens that properties within these the industrial and healthcare sectors have also historically provided the most reliable yield vis-a-vis properties in sectors such as retail or hospitality. Hence it can be deduced that the stable nature of Shari’ah Compliant REITs is largely derived from the intrinsic nature of the properties that it invests in.

Myth 2: Shari’ah Compliant REITs absolutely will NOT take in tenants that handle alcoholic beverages.

This will mostly depend on the standard or model of Shari’ah compliance that the REIT has decided to take on. Most Shari’ah Compliant standards will have a certain level of tolerance towards non-permissible activities. For example Sabana REIT subscribes to the Gulf Coorperation Council (GCC) compliant standard which has a 5 percent tolerant level towards activities that are deemed to be not acceptable to Islam. This means that REITs that subscribe to this Shari’ah Compliant model may have a certain number of tenants who engage in non-permissible activities, such as wine storage, as long as it does not exceed 5 percent of the total gross revenue derived.

Other certifying bodies such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) may have a different model or tolerance level than the GCC before conferring a REIT the status of Shari’ah Compliant.

Myth 3: Only Muslims can partake in Shari’ah Compliant REITs.

Investors of all religious inclinations can partake in this investment vehicle. Shari’ah Compliant REITs have been established to ride on the growing demand, especially from investors in the Middle East, for investments that are aligned to their belief systems. But it has not been designed to exclude investors of any other faith.

In substance, Shari’ah Compliant REITs are no different from ethically-coded investment classes, such as environmentally friendly or fair-trade investments, in that the assets follow a certain moral code. But other than that it is not steeped in any peripheral dogma or exclusivity clauses.

What happened to Singapore equities amidst fears of early QE3 cut back

Were they badly hit?

According to DBS, given the recent volatility in global bond markets and the negative spill over into equity and currency markets, investors will be closely monitoring the FED’s guidance and intentions on asset purchases from the outcome of this week’s FOMC meeting.

DBS Economics Research sees reasons for the FED to sit tight rather than taper asset purchases. US GDP growth in the next 2 quarters is expected to read 1.4%, not much better than the previous two and less than half the long-term average as the impact of the US85bil sequester cut is felt from April-Sept.

Here's more from DBS:


While the recent headline improvement in US unemployment rate led investors to set a straight line projection for the jobless rate to fall to 6.5%, which is one of the triggers for the FED to exit QE3 and raise interest rates, we believe things are never that simple.

Our economist notes that recent manufacturing data has weakened again with the May PMI falling to 49, the lowest since June 2009.

The employment rate sub-indices for both the ISM manufacturing and services have also dipped. If these weaknesses persist, the pace of improvement of the unemployment rate can moderate or even reverse.

Singapore equities were sold down in recent weeks in anticipation of an early QE3 cut back, but the sell-down appears to have reached a short-term support last week.

Consensus expectations are for the FED to reduce the monthly bond purchases to USD65bil from the current US85bil by September and start raising interest rates by Mar15.

Any less from the FED this week can trigger a further rebound in equity prices.
- See more at: http://sbr.com.sg/residential-property/new...h.5TZRjgtR.dpuf

4 Reasons Why REITs Are Better Investments Than Real Estate


By REITsWeek


Scottish American industrialist and philanthropist Andrew Carnegie once said that 90 percent of millionaires became so through owning real estate. This wisdom, though dispensed in the 18th century, is a wisdom that has persisted today judging from the popularity of real estate as an investment class.

There is nothing inherently erroneous in this advice despite the carnage that has unfolded in recent years in the real estate market. As an asset class, real estate investments generate a reliable stream of income besides holding the prospect of capital appreciation. And unlike the yesteryears when real estate investments are within reach of only the very wealthy, prospective investors today can participate in real estate investments through a Real Estate Investment Trust (REIT).

But the popularity of REITs in recent years has brought about a perennial debate as to which is a better mode of investment, buying real estate physically or holding it in a REIT? Each method has its own merits but this article we will discuss four advantages that REITs investors have over traditional property investors.

Scalability
Real estate, be it a single building or an estate, will require constant maintenance and repair. Certain property types such as shopping malls will require even greater maintenance costs as they will need to sustain a decent façade in order to attract shoppers and continue generating income. An investor who puts his money on a single property will need to consider the expenditures on leaking roofs, faulty plumbing or termite infestations as part of his investment costs. In some cases, these costs can be quite hefty and may not be easily recoverable from the tenant.

In REITs, building maintenance costs, or more commonly referred to as capital expenditures (CAPEX), are borne by the REIT managers and are in effect distributed across many shareholders. In some cases, favourable lease terms allow these costs to be passed on to the tenants, practically absolving the REIT investor from any sort of building maintenance costs. As a REITs investor, it is unlikely that you will see CAPEX making significant impact on the returns of your investment. This is the scalability that REITs investors enjoy over property owners.

Diversity
Owning a single property would usually mean that your fortunes are pretty much tied up in the sector that your property is vested in. For example, if you own a small factory complex, it is unlikely that you will benefit from the surge of tourist arrivals in your country. And should the demand for manufacturing slows, you may be in trouble finding a tenant for the property.

REITs investors are able to expose themselves to several sectors of the economy at any one time by distributing their investments across different REIT categories such as Retail REITs (to benefit from surges in consumer spending), Hospitality REITs (to ride on tourist arrivals) or Healthcare REITs (to benefit from increased spending on medical services). This minimises the risk that an investor is over exposed to just one particular sector of an economy. To achieve the same level of diversity with traditional property holdings would require a very hefty investment.

Professional Management
An investor who decides to buy and manage a property as an investment will usually have to depend upon himself in managing the property including renovations, sourcing for tenants and making sure that the building adheres to local safety regulations. These functions can be outsourced to third parties, but this would severely increase the costs of managing the property and erode the returns on investment.

REITs on the other hand are managed by dedicated teams of REIT managers who make it a daily endeavour to look for growth opportunities while keeping borrowing costs low. REIT managers are also very experienced in financing and asset enhancement strategies, often increasing the value of the properties that they manage over time. This is the advantage of having a professional management that REITs investors enjoy over traditional property investors.

Favourable Tax Rulings
In many economies, building owners are liable to annual property taxes, administration fees and stamp duties, on top of paying personal income taxes as an investor. The combination of these taxes can be very overwhelming.

REITs on the other hand are largely exempt from paying taxes at the REIT level in virtually most economies as long as they distribute at least 90 percent of their income to shareholders. In economies like Singapore, the government has gone even further to exempt REITs investors from paying taxes on capital gains and dividends from REITs. Tax rulings vary across the different economies. But one similarity that these economies have is the markedly favourable tax rulings that REITs investors enjoy over the traditional property investor.

For what its worth, Sabana has yet to renew over 40% of its leases set to expire in NOv.

That is a major concern.

Aims looks pretty

am invested in both Sabana and Aims

This post has been edited by prophetjul: Sep 10 2013, 01:42 PM

Should be good....only thing earnings in Rupiah. So currency issues.

Yes BUT..........40% wor.............that's a lotta earnings if they cannot renew!

So its a risk

AV

When investing in REITs, best not to expect too much price increase gains.

Just take that if it happens as bonus.

Yield is the name of the game

Just bear in mind, that yield was before Rupiah tanked.........how much has Rupiah corrected against SGD?

Meaning I would only risk buying Lippo at least 15% lower than the price before the correction.

Sabana cheap sale now.............don't know what happened.

1.06 now

Just saw news


CLOSE OF PRIVATE PLACEMENT OF 40,000,000 NEW UNITS (“NEW UNITS”)
IN SABANA SHARI’AH COMPLIANT INDUSTRIAL REAL ESTATE INVESTMENT TRUST
(“SABANA REIT”) AT AN ISSUE PRICE OF S$1.00 PER NEW UNIT (THE “ISSUE PRICE”)

This post has been edited by prophetjul: Sep 13 2013, 09:04 AM

Yes But that does not explain Sudden drop..

The placement price at Sg1.00 may b the reason

Yessum 40mil new shares

whats their issued share numbers?

Sabana

IPO price was SGD1.05

Issued shares 1.9 b

so 40mil new shares not so much

only 2% dilute but its SGD40mil in the coffers

Well....unless you issue new shares, you are not gonna get new properties to increase your portfolio
especially when your debt ratio is high.
If its accretive to earnings, why not?