Friday, January 24, 2014

S-REIT - Not as muddy as it seems (CIMB)

Not as muddy as it seems
NEUTRAL - Maintained

▊ 2013 was a choppy year for S-REITs, with the market focused on the effects of QE tapering. We examine the possible trends and issues for S-REITs in 2014. Given the headwinds in various sub-sectors, high asset prices and rising financing costs (both equity and debt), REITs may have to look overseas for yield-accretive acquisitions. Amid rising risks and potentially higher interest rates, particularly in 2015, we remain Neutral on the sector, with SUN and FCT as our preferred picks.

Overseas acquisitions for growth
In a rising interest rate environment, REITs usually benefit from higher rental rates and rising asset prices. However, with asset prices near or at historical highs, S-REITs seeking yield-accretive growth may have to acquire foreign assets. But such a move may raise DPU and extend lease profiles, which could result in REITs taking on higher risks. Among the S-REITs under our coverage, we expect all but MCT, CMT, FCT and CCT to begin or continue acquiring assets in foreign countries such as Australia, China Japan and Malaysia.  
Minimal impact from tapering
As at end-3Q13, about 77% of the total debt taken on by S-REITs was fixed rate and only around 10.8% of their total debt will be due for refinancing in 2014. In addition, with S-REITs largely borrowing for periods of one to five years, we expect them to continue enjoying low interest cost for any new debt taken on over the next six months, assuming the Fed funds rate remains low. With the yield spread currently at 457bp compared to its historical average of 374bp, we believe that much of the downside risk from QE tapering has been factored in.  
Maintain Neutral
We remain Neutral on the sector as a result of the lack of good growth catalysts and the potential rise in the Fed funds rate in 2015. Currently, we prefer S-REITs with organic growth potential, local yield-accretive acquisitions and strong balance sheets. SUN and FCT are our top picks.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 21/01/14

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