S-REITs proving irresistible to HK fund houses

Singapore REITs are being favored for their oupetforming yield spreads, says Maybank.

Commenting on the recently held HK road show made by S-REITs, Maybank Kim Eng said "most clients view S-REITs positively as it has one of the highest yield spreads amongst its peers, outperforming even major REITs markets such as US, Australia and Japan."

"This was primarily attributed to the low risk-free rate environment in Singapore (10-year government bond trading at 1.39%) and the relatively higher physical cap rates (net property income that can be extracted per annum for each S$ dollar invested in investment properties), compared to other developed markets," it added.

"Given the macro-environment, funds will continue to chase yields with underlying assets that are defensible. For those funds that are already vested, most stated that they will not be switching out of S-REITs as there are not many investable alternatives in the market," it said.

"Some clients are however switching amongst S-REITs in the different sub-sectors as yield-differentials diverge," it said further.

But, Maybank Kim Eng cautioned how "some funds expressed concern on the rental income support prevalent amongst Office REITs in Singapore when they acquire a new office building. Increasingly, many of them deem this as a form of 'financial engineering' which has already been “priced-in in its original purchase consideration.'"

"Some funds are also worried about S-REITs that are trading below book and potentially making cash-calls in the near future to fund its next acquisition," the brokerage firm said.

"Given the size and listing history of S-REITs, some funds opined that M&A activities (REITs acquiring one another) could be the next significant catalyst that can “move the actual needle” and cause a re-rating of the overall sector," it added.