Safe and sound: S-REITs resilient amidst market volatility

S-REIT – resilience amidst volatility. In the recent equity market sell off, the FSTREI while corrected by some 5% versus the 12% and 25% fall in the STI and FSTREH (property developers index) respectively. S-REITs now offer a prospective a FY11-12F distribution yield of 6.5%-6.7%, which represent a 500 bps spread above the long-term government bond. It is now closer to - 1SD of the sector historical yield trading range. With earnings forecasted to be growing steadily and supported by an expected strong S$, we believe that S-REITs continue to offer a compelling investment proposition for income investors.

Seeking sustainable growth-preference in Retail and selected Industrial REITs. We re-iterate our preference for retail REITs. They should continue to deliver earnings growth in the coming quarters on the back of sustained positive consumer sentiment. Even in the event of an economic downturn, retail REITs’ exposure in necessity shopping, eg. Supermarkets, F&B outlets, have kept earnings fairly stable. Industrial S-REITs also offer strong stability and visibility given a larger proportion of their income deriving from master-lease structures. While we continue to see Hospitality REITs delivering good numbers going into a seasonally busier 2H11, we believe that growth momentum should be slowing down given a higher base effect.

Picks in Retail and selected Industrial REITs. We see value emerging in CMT which is our big cap pick with attractive FY11-12F yields of c5.3-5.9%. MCT is attractive for its strong organic growth coming off from a first renewal cycle at its Vivo city retail mall. Amongst the industrial REITs, MLT stands out post an active 1H11 and is poised to deliver strong earnings growth into 2H11. We continue to see relative value amongst the smaller cap S-REITs - Cache and FCOT, which offer higher than average yields with limited earnings downside.

S-REITs continue to offer stability. Current global economic uncertainties and volatile market conditions has made investors to look towards equities that offer stable returns and S-REITs, in our view, fit that criteria perfectly. S-REITs offer currently offer a prospective FY12 yield of 6.5% - which is over 500 bps spread above the long-term government bond. This is an attractive level as its currently closer to the –1SD of the sector’s historical trading range (long term average spread of c3.0%).

Furthermore, S-REITs earnings have proven to be relatively defensive and is expected to continue growing, while a strong S$ and supported by a low interest rate environment are key attributes that we believe will continue to support investor interests in the sector going forward.