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SI Research: 3 Developments that could Make S-REIT Attractive
Aspire | 01 December 2015
By: Raymond Leung
Articles (142) Profile

Since words of a rising interest rate came from the Federal Reserve (Fed), the S-REIT sector has been facing strong headwinds. The benchmark of the sector, S&P Singapore REIT Index has fallen 11.4 percent year-to-date (YTD).

Source: YTD Chart of S&P Singapore REIT, S&P Dow Jones Indices

However, there are developments in the sector that are bringing interesting changes. Three new interesting developments in S-REIT might be the game changing factors that can turn the market around.

1. Merger & Acquisitions
Last month, Saizen REIT (SZREIT) received an offer for its asset for a premium over trading price and appraised value of the properties. This may spark a new round of merger and acquisitions (M&A) in the S-REIT market. The smaller sized REITs (less than $500 million) are the likely targets of M&A.

Furthermore, there is demand in the market for Singapore properties. After negotiation fell out for Asia Square Tower 1, the owner Blackrock is talking to new potential buyers while Rivervale Mall was sold by CapitaLand Mall Trust (CMT) to a private equity. Purchasing a portfolio of properties instead of an individual enables the investors to quickly gain exposure in the market. Similar corporate actions can be seen from Global Logistic Properties’s (GLP) acquisition of IndCor properties in the US.

An increase in acquisition of properties in Singapore will spike the prices of S-REIT with local exposure as value of the properties goes up.

2. New Regulation on Debt
The Monetary Authority of Singapore (MAS) has put in place a new regulation on capping debts of REITs. This new regulation will do away the previous two-tier leverage regulation and cap all gearing of REITs at 45 percent. Currently, all the REITs have met with the regulation.

Source: NRA Capital; Bloomberg

This has brought to the market a new trend of financing for the sector. Since the implementation of the new regulation, Ascendas REIT (AREIT) and Keppel REIT (KREIT) have issued perpetual securities. Perpetual securities are viewed as equities rather than debts and hence, are not subjected to the new regulation.

Given the nature of perpetual securities (indefinite return date), the issuance of these securities will likely be concentrated around large cap REITs or those that have a strong sponsor. Smaller REITs and those with less reputable sponsors will have to resort to right issues to raise fund.

Yield driven investors will now have more options when choosing their investments as more perpetual securities are expected to be issued.

3. Rise of Interest Rates

Source: Federal Reserve Interest Rates, TradingEconomics

Out of fear towards the Fed interest rate hike, S-REITs have been taking hits with its value dropping 11.4 percent YTD. Based on the indication from the latest Federal Open Market Committee (FOMC) meeting, Fed interest rate is likely to go up in December.

If the interest rate goes up, it will remove the uncertainty that is in the market. This will give a new basis to relook at S-REIT as sensitivity to the hike decreases. Value has surfaced at some REITs as they have faced downward pressure for a prolonged period.

Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.


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