S-REITs – Just keep swimming
•Strong occupancies and performance across the different segments indicate organic growth.
•Cap rates: underlying book values should remain resilient
•Impact of labour crunch on tenants: securing and maintaining quality labour is first priority
•REITs in the washer, but fundamentals are intact
The proof is in the pudding. We hosted S-REITs from the industrial, hospitality and retail sectors at the recent bi-annual DBSV Pulse of Asia Conference. Against a backdrop of questions about higher interest rates and borrowing costs, labour crunch and slowing economic growth in Asia, the REITs remained generally upbeat about occupancies and rents, citing still-strong tenant performance and positive rental reversions as indicators of organic growth going forward.
Cap rates to remain relatively stable at this point, Japan retail segment may see compression in the medium term. S-REITs generally expect NPI growth to drive or support valuations. Book value cap rates have not compressed significantly, hence, the underlying book values should remain resilient. For example, AREIT’s Singapore portfolio cap rate is 6.6% and FCT’s assets have only seen 25bps compression compared to two years ago. In Japan, the suburban retail segment could see a lag in narrowing of cap rates, only after major segments such as commercial property have experienced cap rate compression.
Labour: train, retain and automate. Most REITs are managing the impact of rising labour cost on their operating expenses well. This should translate into stable NPI margins. Industrial REIT tenants are looking to automate operations rather than hire additional labour, which should help to improve productivity and reduce their dependence on labour.
Look for REITs with organic growth. The turbulent share price performance in the last few months should not detract from the achievable and visible organic growth that will drive earnings going forward. S-REITs remain solid bets for yield seekers. Within our coverage, we like Cache for its locked-in earnings growth and acquisition opportunities, FCOT for its strong capital management and organic growth from Alexandra Technopark, and MCT for its strong reversionary growth profile, particularly from VivoCity.
Publish date: 12/07/13