S-REIT growth boom feared to be running out of steam soon

Prices could "rationalise" as early as 2H13.

Maybank Kim Eng said that fantastic growth that has so far been making S-REITs one of the hottest investments could dissipate sometime next year or early 2015. Prices will be affected even earlier due to the forward-looking nature of the markets, leading to rationalisation "probably in 2H13 or 2014," said the research firm.

Here's more from Maybank Kim Eng:

Reiterate NEUTRAL for S-REITs following uninspiring risk-reward profile as: (1) Yield spreads against ten-year bond yields continue to tighten with rising bond yields. (2) Downward pressures on rentals with slowing growth in Singapore.(3) Risk of asset-price declines in the event that monetary tightening is not conducted gradually (a case in point: Japan’s “lost decade” after the Finance Ministry sharply raised interest rates in late 1989). Our top picks remain only with the Retail REITs, in which the mismatch between rentals and physical prices have not proved unnerving. Reiterate BUY for CMT (TP: SGD2.36), SGREIT (TP: SGD0.95), SUN (TP: SGD1.85).

Gravity defying, but will QE-inflated asset prices sustain? S-REITs have registered an impressive price return of 5% YTD and 43% since end-2011. Their stellar performance in FY12 outshone even the major REITs markets in the US and Australia. Nonetheless, the rapid step-up in asset values (fuelled in the past years by quantitative easing [QE] policies) and the gradual creep-up in risk-free rate have skewed risks to the downside.

Let the buyers beware. Fundamentally, we believe that S-REITs stock price performance should be a function of forward DPU growth and physical asset prices. The almost 60% returns generated by S-REITs in 2005-2006 were buttressed by similarly outstanding DPU growth rates of 19-43% pa over 2005-2008 and strong growth in rents and capital values in 2005-2007 (in short, fundamentals-driven growth). However, the recent SREITs 2012 rally was primarily fueled by QE-inflated asset values and ample liquidity, and not so much driven by underlying fundamentals such as strong DPU growth or rental upside, in our view.

Rational Temperance. Unlike the “fundamentals-driven growth” experienced by S-REITs in 2005-2006, we expect the current “QE-inflated growth” to run out of steam once the “artificially compressed” interest rates in the US, and hence Singapore, start normalising sometime next year or early 2015. However, as markets are typically forward-looking, we expect S-REITs prices to rationalise probably in 2H13 or 2014.

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