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Brokerage singles out Ascendas-Reit, Suntec Reit and Ascott Residence Trust as interesting counters

DESPITE the recent stock market volatility, UOB Kay Hian is recommending clients to be overweight in the real estate investment trust (Reit) sector, citing its resilient fundamentals, higher yields and defensive nature. The brokerage picks out Ascendas-Reit, Suntec Reit and Ascott Residence Trust as the interesting counters on its watchlist.

In a report, UOB Kay Hian says that Reits with superior management capabilities and asset enhancement potential could outperform the pack with attributes such as established track records, large and diversified portfolios, ‘better tenant profiles or stronger parental support’.

Looking purely at yields, the brokerage identifies office Reits as a sector to watch out for, as its lower yields should improve if tight office space supply continues to drive up office rents. Also, Suntec Reit looks attractive with a 4.15 per cent yield and is well positioned to benefit from the upcoming integrated resorts.

The report singles out A-Reit as having the ‘highest quality’, with a yield of 5.48 per cent. ‘Hi-tech industrial space and business parks are gaining popularity, owing mainly to the spillover of demand for office space and rising office rents,’ it says.

In the hospitality segment, UOB Kay Hian said a strong interest in Ascott Residence Trust has driven its yields down to 3.18 per cent. ‘Although CDL Hospitality Trust has a low yield of 2.79 per cent, it is the only Reit with exposure to the hotel sector and will be a beneficiary of the booming tourism industry arising from the re-making of Singapore’.

Among the plays with mostly overseas portfolio, it notes First Reit’s high yield of 8.8 per cent, but adds that this also reflects its higher risks.

In the report, UOB Kay Hian says it expects interest rates to fall soon, and this will make Reits and other fixed-income instruments look attractive in terms of yields. Also, cost of funding for acquisitions should fall with high-yield accretions from new acquisitions. ‘We see room for further upside for office rentals, especially for prime office space where supply is still limited. We are also upbeat on the industrial segment as it has the highest dependency on acquisitions for yield enhancement due to the limited organic growth from less sensitive rental rates.’

In contrast, retail Reits ’should benefit the least as leases usually include a variable rent component dependent on tenants’ sales’. Also, growing economic uncertainties means those funds are likely to be more volatile, as they depend on consumer spending.

Based on its research, for every one per cent fall in interest rates, Reit yields should fall marginally by 0.27 per cent - indicating the relative insensitivity of yields to interest rates. This also implies a wider premium as interest rates fall, and ’supports our stand that Reits look more attractive in terms of yields as interest rates fall’.

Furthermore, the report says Reits demonstrate market resilience due to their stable income derived from locked-in leases.

‘This provides protection against any possible short-term weakness in rentals during the locked-in period. In addition, structured leases with built-in incremental rental reversions will ensure that Reits will not miss out on any rental upcycle.’

UOB Kay Hian believes longer term prospects for Reits also look good thanks to the demographic characteristics of low birth and death rates, and a rapid growth in the number of elderly people.

‘This global phenomenon underlies the challenges facing mutual and pension funds which are seeking alternative defensive asset classes and high-yield instruments consequently, as they increase their exposure to Reits. We view this as a long-term positive for Reits as such funds’ exposure to Reits increases, typically so in developed economies.’

Another positive is the liquidity that will be drawn to the region as a result of Singapore’s pro-Reit environment. Consequently, the ‘relocation of businesses and people to Singapore could boost demand for shopping malls, offices, serviced apartments, hotels and industrial space, hence driving up rentals’.

Source : Business Times - 27 Mar 2007

It also proposes clearer and more flexible guidelines; licensing framework

In another move to make Singapore a major hub for Real Estate Investment Trusts (Reits), the Monetary Authority of Singapore yesterday issued a consultation paper on Reits, barely 18 months after it last made revised guidelines on them.

Among other things, the proposed changes seek to put in place measures to safeguard the interests of unit holders. These include:

-  enhancing disclosure on financial engineering or short-term yield-enhancing arrangements by Reit issuers and the risks associated with them;

-  abolishing discounts to institutional investors at initial public offers;

-  and banning ‘poison pill’ arrangements by Reit managers at IPO to entrench their positions, such as long-term management contracts and high termination fees.

The proposed changes also seek to:

-  make investment guidelines for Reits clearer and more flexible;

-  rationalise guidelines where compliance costs exceed benefits;

-  and introduce a licensing framework for Reit managers under the Securities and Futures Act.

Market watchers say the proposed changes should promote the continued development of Singapore’s Reit industry, which has grown to 15 Reits with a combined market capitalisation of more than $25 billion since the first Reit was floated just five years ago. Also among the proposals is a requirement that Reits invest at least 75 per cent of their assets in income-producing real estate. At present, they are required to invest 35 per cent in real estate and at least 70 per cent in real estate and real estate-related assets, such as shares of property companies.

MAS also proposes to remove the 5 per cent single-party limit for investments in real estate-related securities, but retain it for non-real estate-related securities, as Reits should not have concentrated investments in such assets.

CapitaMall Trust Management Ltd CEO Pua Seck Guan said the changes will ‘create more avenues for investments by Reits, but they could alter the risk profile of some Reits’.

Another proposal is to allow Reits to pay dividends in excess of current income, subject to conditions.

MAS proposes to streamline several compliance requirements, many of which relate to valuations. It wants to do away with the requirement for an independent expert’s opinion on a proposed interested party transaction when the value is equal to or greater than 5 per cent of a Reit’s net asset value.

A Reit analyst said: ‘The package of changes should make things more cost efficient. As it is, Singapore is already in a good position in the Reits market. It’s a question of keeping an edge on others.’

Industry observers are not surprised by most of the measures proposed by MAS to protect unit holders - such as wider disclosure and banning poison pills - because these were highlighted a while ago. ‘It’s just a formalisation,’ a market watcher said.

The consultation paper says: ‘MAS is concerned that the costs of such short-term yield-enhancing arrangements and their negative impact on long-term returns may not be adequately disclosed or understood by investors.’

MAS wants market feedback on its consultation paper by April 23.

However, the paper is silent on a subject many Reit industry players and market watchers have been waiting for - a takeover code for Reits, which could facilitate consolidation in the local market by allowing more efficient players to take over less efficient ones.

MAS said last week that the Securities Industry Council (SIC), which administers the takeover code, is studying whether the code should apply to Reits and whether specific provisions should be tailored for them.

The Reit analyst said: ‘MAS’ latest proposal to ban Reit managers from including long-term management contracts and high termination fees during IPO could well be a precursor to a takeover code for Reits. By disallowing arrangements by Reit managers to entrench themselves, it will make it easier to do a takeover.

‘As our Reit market grows in size, it will reach a stage where it will be good for the more efficient Reit players to have a chance to take over the less efficient players.’

Agreeing, CMTML’s Mr Pua said: ‘Certain Reits will underperform and a takeover provides unit holders an avenue for exit and for value to be delivered.’

However, he is concerned about the proposed ban on discounts to institutional investors at IPO. MAS argues that ’such differential pricing would disadvantage retail investors’. But Mr Pua believes such a move would ‘reduce pricing power and flexibility of a Reit issuer to ensure the success of the deal’.

Another experienced Reit player said: ‘Discounts are usually given to cornerstone investors. Sometimes you need them to establish the validity of pricing and yield for an issue. In other cases, you may have vendors selling assets to the Reit on the basis that they will be given IPO units at a discounted price.

‘Of course, the issuer can get round the proposed rules by doing a pre-IPO placement to cornerstone investors.’

Source : Business Times - 24 Mar 2007

MAS invites feedback on ‘enhancements’ suggested by it

Market players BT spoke to said that the changes to the regime governing real estate investment trusts (Reits) here - proposed by Singapore’s central bank - are more to prevent problems in a maturing Reit market than an attempt to correct current bad practices.

Proposed Reit Changes

The Monetary Authority of Singapore (MAS) yesterday released proposed ‘enhancements’ to the Reit regime here, seeking feed back on a wide variety of changes, including disallowing discounts for institutional investors during initial public offerings (IPOs), increasing the minimum investment on real estate, preventing Reit managers from entrenching themselves and revising rules on the use of ‘financial engineering’ to boost short-term returns.

One major concern MAS has is the use of ‘financial engineering’ by Reit managers to boost short-term returns. It wants to force Reits to disclose the use of deferred payment arrangements, and step up interest-rate swaps and dividend waivers to boost immediate returns for investors.

Market watchers said that this is in response to activity in the Hong Kong Reit market.

‘There has been a lot of financial engineering with Reits in Hong Kong, much to the detriment of the market,’ said Mark Ebbinghaus, the head of Asian real estate at investment bank UBS. With the Singapore Reit market maturing, tighter frameworks need to be in place, he said.

The MAS also said it will seek to prevent Reit managers from using long-term contracts and high termination fees to maintain tight control over the trusts. Entrenched Reit managers were seen as one of the ‘poison pills’ harming the market, as they could sometimes stay on even when underperforming.

Michael Smith, head of property investment banking in Asia at Goldman Sachs, welcomed the change, saying that it will make the market more effective. ‘I would prefer that they (Reit managers) stayed more on their ability to perform than because of other things,’ he said.

Market watchers also said that the removal of discounts for institutional investors, and the raising of the threshold for minimum investment in real estate, would help the Reit market here mature.

Property trusts would be required to invest at least 75 per cent of their assets in income-generating real estate, up from 35 per cent now, to bring rules in line with regulations in the United States, the UK and Hong Kong. However, this is not expected to have an impact on existing Reits, which have already crossed the threshold, sources said.

Overall, market players welcomed the proposed changes as those that would make the regulatory regime for Reits here ‘tighter’.

‘Anything that makes the market more transparent is good for investors,’ Winston Liew, an analyst at OCBC Investment Research, told Bloomberg. ‘On the regulatory front, the Singapore government has been very generous, but the next big step they need to address is on mergers and acquisitions.’

Source : Business Times - 24 Mar 2007

It is seeking feedback on proposed changes as more property trusts are listed in Singapore

SINGAPORE investors may soon get better information and clearer guidelines on real estate investment trusts (Reits) - which have become wildly popular here in recent years.

The Singapore central bank yesterday proposed changes to these property funds’ guidelines to better protect the interests of Reit unitholders.

These include forcing Reit mana-

gers to disclose any financial arrangements they use to boost the short-term yields of Reits and abolishing discounts to institutional investors which buy units in Reit public offerings.

Reits own a portfolio of properties such as malls or factories and get income from the rents. Unitholders receive regular payouts like dividends.

The Monetary Authority of Singapore (MAS) yesterday issued a public consultation paper to get feedback on how to make property fund guidelines clearer and to set up a licensing framework for Reit managers.

Since 2002 when the first Reit was listed, Singapore’s Reit market has burgeoned to 15 listed trusts with a market capitalisation totalling more than $25 billion. This growth was encouraged by government incentives such as tax- free dividends for individual investors of property trusts.

‘There is also a healthy pipeline of proposals seeking to securitise real estate located in the Asia-Pacific,’ noted the MAS.

Analysts and market watchers lauded the proposed changes as timely in improving the transparency of Reits. This comes amid longstanding concerns that some Reit managers may be using complex ‘financial engineering’ arrangements to lift short-term gains.

Such arrangements include deferred payment of units to vendors of assets that boost distribution yields in the initial years, as well as interest rate swaps to boost dividend yields but which may result in lower distribution yields down the road.

The MAS said it ‘is concerned that the costs of such short-term yield-enhancing arrangements and their negative impact on long-term returns may not be adequately disclosed or understood by investors’.

Such payment structures came under scrutiny here in 2005 when Temasek chief executive Ho Ching warned investors about the use of deferred units. It was widely known that Suntec Reit had been doing so.

Analysts say that Singapore’s Reits have relatively simple structures compared with those in Hong Kong where the use of financial engineering schemes is widespread.

In its proposed changes, the MAS also intends to ensure retail investors are treated equally at the time of a Reit’s initial offer in terms of pricing, by forbidding Reit managers from offering discounts to institutions.

‘Such differential pricing would disadvantage retail investors,’ it said.

Another proposal is to prevent Reit managers from maintaining control of Reits by using long-term contracts and high termination fees.

Also, property trusts may be required to invest 75 per cent of their assets in income-generating real estate, up from 35 per cent now. This would bring rules here on a par with those in the US, Britain and Hong Kong.

In addition, MAS may remove a rule that not more than 5 per cent of a Reit’s assets can be invested in securities issued by a single party.

The public has until April 23 to submit views on the proposal.

Amid a recovering property market, Reits in Singapore have surged by an average of about 45 per cent in the past six months compared to 27 per cent for the Straits Times Index.

Yesterday, investors’ response to the proposed MAS changes, which were released on its website at about about 4pm yesterday, was muted.

Among the top Reit gainers was CapitaRetail China, which rose six cents to $3.04. Suntec Reit remained unchanged at $1.93, while CapitaCommercial Trust lost five cents to $2.87.

Source : Straits Times - 24 Mar 2007

PRUDENTIAL Assurance yesterday announced the launch of an investment-linked insurance fund that aims to ride on the commercial property upturn and achieve an annual return of 10-13 per cent over the next three years.

The PruLink Global Property Securities Fund will invest mainly in real estate investment trusts (Reits) worldwide. The fund’s size is expected to hit US$100 million by year-end, said LaSalle Investment Management (Securities), which will manage its portfolio.

‘We would be absolutely delighted to cross the US$100 million threshold and we are certain we can hit the mark,’ said Todd Canter, managing director of LaSalle Investment Management.

The fund will offer exposure to global Reits and, at the same time, provide insurance coverage.

The expected annual return includes an expected dividend yield of more than 3.2 per cent for a start, as well as capital appreciation of the stocks and Reits the fund invests in. Mr Canter said that with more and more Reits being listed, and paying ever-increasing dividends, the fund’s dividend payout can be expected to increase with time.

The fund will invest in about 70-75 stocks and Reits, mainly in the commercial property sector, he said. About 85 per cent will be invested in Reits and the rest in property companies. The fund aims to own stakes in Reits and public companies that own ‘bricks and mortar’. It will generally stay away from companies that focus solely on development.

Mr Canter believes the commercial real estate segment is set to enjoy strong growth. ‘We’re only in the first half of a commercial real estate recovery,’ he said. ‘We’re not talking residential - for residential, we’re near the peak in most markets. But for commercial we’re somewhere in the first third to first half of market recovery.’

The fund has CPFIS approval, which means investors can use their CPF funds to buy units. The initial offer period will be from March 26 to May 4, during which units in the fund will be priced between 95 cents and $1.

Source : Business Times - 23 Mar 2007