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S-REITs gaining popularity among investors

Singapore-listed Real Estate Investment Trusts (S-REITs) have gained popularity among investors this year, with unit prices outperforming the STI.

SINGAPORE: Singapore-listed Real Estate Investment Trusts (S-REITs) have gained popularity among investors this year. Their unit prices have risen by about eight per cent year-to-date, outperforming the benchmark STI.

While market watchers are upbeat about the growth prospects for REITs, they say investors should focus on good asset quality.

Suntec REIT is among the top performing REITs in Singapore this year, following completion of the first phase of renovations.

As a group, all 26 REITs have averaged total returns, on a unit price and dividend basis, of 11.96 per cent so far in 2014. This is compared to last year when total returns fell by 3.75 per cent due to uncertainty over when the US Federal Reserve would end its monetary stimulus.

With the Fed now not expected to move till next year, analysts say investors are being drawn to higher yields.

Some S-REITs are also looking for acquisitions, thereby raising their appeal.

"The average gearing across the REIT space is at 33.4 per cent. That's still a pretty healthy level,” saod Eli Lee, investment analyst at OCBC Investment Research.

“In addition, with an average distribution yield of 6.5 per cent, we are still looking at an abundant scope for acquisitions that will be accretive, both in Singapore and abroad as well. We've also seen management executing strongly in terms of asset enhancement initiatives and also on new developments."

According to a DBS report, S-REITs have maintained conservative balance sheets, and estimates gearing to increase to 34.3 per cent going two years forward.

However, they also caution that investors should focus on asset quality in anticipation of rising interest rates.

"On a consensus basis, this is expected in the middle of 2015. With this in mind, we're fairly neutral on the outlook of the REITs sector,” said Mr Lee.

“We advocate that investors take a bottom-up approach looking for specific names with strong fundamental outlooks, good track record from management, and attractive yields as well.”

Going forward, analysts expect a large upcoming supply to weigh on rents for industrial space.

“We don't expect earnings to dip, mainly because they're still renewing rents signed close to three years ago and that was near the bottom of the market,” said Derek Tan, analyst at DBS Group Equity Research.

“So what it means for the industrial landlords is that their reversionary strength would start to moderate, so their earnings growth momentum will also start to moderate."

The retail segment on the other hand is expected to deliver robust growth supported by high occupancy rates, while the hospitality segment will see a rebound with higher corporate and visitor arrivals expected to exceed room supply. 

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