Equity Thursday : Bad Vibes For Reits

The FTSE Straits Times Real Estate Investment Trust Index is  up 7.2 % on the year and 179% higher than its low back in Mar 2009.

FSSTI REIT INDEX10Y Chart of SREITS and their dividends (mirroring each other for obvious reasons)

Taking a look at the largest IPOs for Singapore in the past 12 months, we find that 6 of the top 7 IPOs have been for Reits and business trusts.

1. Accordia Golf Trust SGD 758.56 mio [Business Trust]
IPO  Price 0.97 (24 Jul 2014)
Current Price 0.79

2. Pacc Offshore Services SGD 388.27 mio [Marine Transport Company]
IPO Price 1.15 (17 April 2014)
Current Price 0.99

3. IREIT Global SGD 369.02 mio [REIT-office property]
IPO Price 0.88 (4 Aug 2014)
Current Price 0.90

4. Fraser Hospitality Trust SGD 367.85 mio [REIT – hotel]
IPO Price 0.88 (30 Jun 2014)
Current Price 0.895

5. Viva Industrial Trust SGD 365.15 [Business Trust]
IPO Price 0.78 (14 Oct 2013)Current Price 0.805

6. Suntec REIT SGD 350 mio additional offering [REIT]
IPO Price 1.605 (18 Mar 2014)
Current Price 1.785

7. OUE Commercial Reit SGD 346.4 mio [REIT]
IPO Price 0.80 (17 Jan 2014)
Current Price 0.805

According to a trader, the Accordia Golf Trust tanked at their debut because the market perceived that 7% returns was not good enough.

CNBC reports today that “some of the fundamentals looking at tad rocky” for Singapore REITS from a BNP report. http://www.cnbc.com/id/101932589

Yet if we look at Singapore REITS from a year ago, yields and prices have generally outperformed even after adjusting for a higher risk free rate that Citibank did a year ago by raising their projections for a 10Y Singapore government bond yield of 3.1% (average between 2003-2008) from 2.2%.
Check out https://tradehaven.net/market/singapore-reits-and-their-bonds/ to get some of the price targets from a year ago.

Another bummer story is UBS’s hedge fund unit liquidating most of their stakes in US REITS in 2Q14, according to filings which was reported in Bloomberg today. http://www.bloomberg.com/news/2014-08-20/ubs-hedge-fund-sells-u-s-real-estate-trusts-in-second-quarter.html

As I pointed out in June, US REITS have been the top performers in REIT space this year. https://tradehaven.net/market/reits-and-comparisons/
Thus perhaps its no wonder some profit taking would be sensible.

SREITS have been struggling to keep up with STI gains in the past 2 months and doubts are starting to surface again from various angles.

REIT prices are affected by 1. earnings i.e. occupancy and rentals, and 2. relative yield to the risk free rate (which most people tend to associate with the 10Y note). Other factors include 3. availability of credit i.e. ability to refinance and 4. valuation of underlying assets which is relative to 1.earnings, and asset quality.

Given most of our SREITS are lowly geared and ability to refinance is high, we just need to worry about earnings and the relative yields. And given that the outlook for both are starting to cloud up a little, especially after last night’s FOMC minutes that has a clear hawkish bent, I think that the media hype could drive prices lower than higher in the near term.

Table of SREITS and Business Trusts.


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