SREITs are in for a triple whammy.
2013 did not paint a pretty picture for Singapore REITs as the industry got bombarded with consecutive tightening measures, stiffer loan rules, and the QE tapering nightmare which became a real life scare at the start of 2014.
Singapore Business Review interviewed analysts on what they think could make 2014 a worse year for SREITs. Here's what they said:
DBS Group Research:
The FED’s decision to trim its US$85 bn purchase of mortgage purchase and treasuries by US$5 bn each in Jan’14 and will keep further tapering quantum dependent on supportive economic growth data.
However, the Fed has also said that it will hold the Fed funds rate low for a long time, even if the unemployment rate falls below 6.5%. With uncertainty on the timing of tapering now out of the way and market expecting that the FED would undertake further stimulus reductions in moderate steps based on economic data, we believe this will provide a level of certainty for the SREITs.
The start of FED’s stimulus withdrawal is likely to mean that long term interest rates are likely to rise in the medium term because of expectations of higher inflation, and therefore it also implies that investors of S-REITs are likely to require higher rates of returns (i.e higher yields to compensate for
thinning spreads against the 10-year bond), resulting in a cap in share price re-rating potential for the sector in the medium term.
Ample liquidity resulted in strong competition for assets and compressed yields, and this made it increasingly difficult for SREITs to acquire yield accretive assets in Singapore. There were 14 acquisitions in 2013, which represented only half of the 29 acquisitions seen in 2012 As a result, we believe that any acquisitions in Singapore will likely be sponsor-driven.
Given diminishing returns from acquisitions due to rising cost of capital, we are now more selective on acquisitions going forward. We prefer -
REITs that can continue to deliver growth that is mainly organic or if they acquire, to demonstrate that the target asset is able to deliver higher returns compared to their existing portfolios on a risk adjusted basis.
Tricia Song, analyst, Barclays:
December sales were -80% m/m and -82% y/y to 259 units, the lowest in five years, since 108 units in Jan 2009, according to Urban Redevelopment Authority (URA) data. While December is usually a weak month, given the festivities, sentiment was poorer in 2013 after the total debt servicing ratio (TDSR) rules in June. Developers launched only 118 units (-92% m/m).
With no new condo launches, sporadic sales were recorded from previous months’ launches, and we note some 2-21 units from November’s launches were returned.
This latest data brings FY13 developer sales to 14,980 units, 33% below the 22,197 units sold in FY12. We do not expect a rollback of the policies yet
(see our report dated 8 Jan, When will tightening policies unwind?), as home prices are still 61% above their 2009 levels, and GDP, employment and interest rates still appear favourable.
Barring any rollback in policies, we now expect 2014 volumes to fall 20% y/y to 12,000 units, as the TDSR rules in place since June 2013 continue to bite, and as buyers become more cautious on the abundant supply pipeline.
We maintain our negative stance on the Singapore residential sector, as we expect prices to fall 5% in 2014 and another 5-15% in 2015 as interest rates rise, and the vacancy rate could reach an unprecedented 9.9% by 2016.
Pang Ti Wee, Donald Chua & Tan Xuan, analysts, CIMB:
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.
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.
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.
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