What you need to know about Singapore REITs

Theme 1: Sustainable Earnings growth in 2012. We remain most optimistic on retail REITs that offer the highest earnings upside, underpinned by the completion of various asset enhancement initiatives (CMT & FCT), coupled with positive rental renewals. Among the industrial landlords, we like logistics players (MLT, Cache); we expect earnings to be most resilient given limited competitive supply and that demand for warehousing space has historically been the most sticky. Hospitality REITs should see RevPAR growth moderating to the tune of 0-5% due to see increasing competition in 2012, with potential downside in the event of a prolonged economic slowdown.

Theme 2: Inorganic growth opportunities. After acquiring S$5.2bn worth of properties YTD amid a competitive landscape boosted by low interest rates and ample liquidity, we also saw an increasing trend in S-REITs undertaking development /asset enhancement initiatives (AEI) in order to further enhance portfolio yields. AEIs typically generate higher than average returns with IRR of between 8-10%. The progressive completion of these AEIs is expected to be the key earnings driver in FY12-13F. Apart from these, sponsored REITs continue to stand ahead of peers in their ability to tap their respective developer sponsors for growth opportunities at appropriate times.

Theme 3: Balance sheet strength and risk of equity fund raisings. We assess S-REITs’ financial metrics using a holistic approach. Apart from a gearing level of 34.4%, which is comfortable, we do not see any pressing short-term debt refinancing needs. In fact, improved short- term liquidity positions and better financial metrics lend support that S-REITs are better positioned to weather the economic slowdown in 2012. In addition, S-REITs are unlikely to embark on dilutive equity fund raisings (as we seen back in 2009) to recapitalize their balance sheets but if there are any, proceeds are likely to be used to fund acquisition opportunities.