REITs to remain favourable in near term Since  the  beginning  of  the  year,  the  Straits  Times  Re  Invest  Trust  Index (FSTREI  Index  -  an  index  which  tracks  the  performance  of  S-REITs)  has risen by 32.0%, outperforming the STI (+12.7% YTD). Given a prolonged low interest  rate  environment  coupled  with  global  uncertainty,  we  believe  the chase  for  dividend  yield  plays  will  continue  to  remain  relevant  in  the  near term.  Going  forward,  as  the  Singapore  dollar  continue  to  stay  strong,coupled with volatility in  the global market and negative real interest rates (after taking inflation into consideration), we  continue to OVERWEIGHT on the REITs space as a whole but favour on office and retail REITs, with our top pick in Frasers Commercial Trust (FCOT SP; BUY; TP: S$1.41). 
 
10-year  governmental  bonds  yield  compressed.  As  Singapore  continues  to remain as one of the few countries globally with triple 'A' credit ratings, the strong demand  for  its  bonds  has  compressed  the  interest  rate  of  Singapore's  10-year government bond to a historical low point of 1.3%. As a result, despite the rally of S-REITs' share price since the beginning of this year, the average 12-month forward  dividend  yield  spread  of  the  S-REITs  sector  is  currently  still  trading  at about c.50bps above the long term average.

Most  REITs  posted  stellar  results  last  quarter.  During  the  latest  quarterly earnings announcements, most (except for a selected handful) REITs announced stellar  earnings,  including  higher  NPIs  and  DPU  on  a  YoY  basis.    The  REITs under  our  coverage  posted  on  average  +4.7%  YoY  and  +6.1%  YoY  growth  in NPI and DPU respectively. If Suntec REIT (which is currently experiencing a drop in DPU as a result of the AEI at Suntec City) was stripped out, average NPI and DPU growth came in at a respectable 8.1% and 8.0% respectively.

S-REITs  expected  to  remain  favourable  in  the  near  term.  Going forward, as the macro picture continues to remain uncertain with interest rate remaining low; we  believe  S-REITs  will  stay  favourable  in  the  near  future.  In  addition,  as  the market  continues  to  be  flooded  with  liquidity;  result  of  quantitative  easing  by central  banks  around  the  globe,  together  with  the  lack  of  risk  appetite  amid  a prolonged  low  interest  rate  environment,  we  believe  S-REITs,  particularly  those with good corporate governance, strong earnings, stable payouts  and high  yield spread will continue to outperform.

S-REITs  still  trading  above  historic  spread  despite  rally. Given  a prolonged low  interest  rate  environment  coupled  with  global  uncertainty,  we  believe  the chase for dividend  yield  plays  will continue to remain relevant over the  next few months. Currently, the average 12-month forward dividend yield spread of the S-REIT  sector  is  approximately  53bps  above  the  long  term  average  of  410bps; leading us to believe that there is room for further yield compression.

REITs  continue  to  remain  favourable.  In  addition,  as  the  market continues  to be  flooded  by  liquidity;  result  of  quantitative  easing  by  central  banks  around  the globe, coupled with low risk of near term hike in interest rate and the lack of risk appetite,  we  believe  S-REITs  with  good  corporate  governance, strong  earnings, stable payouts and high yield spread will continue to outperform.

Most  REITs  posted  stellar  results  last  quarter.  During the latest quarter's result  season,  most  (except  for  a  selected  handful)  REITs  announced  stellar earnings, including higher NPIs and DPU on a YoY basis.  The REITs under our coverage posted on average +4.7% YoY and +6.1% YoY growth in NPI and DPU respectively. If Suntec REIT (which is currently experiencing a drop in DPU as a result of the AEI at Suntec City) was stripped out, average NPI and DPU growth came in at a respectable 8.1% and 8.0% respectively.

Prime suburban malls to outperform urban malls. Spot rents of both prime and suburban malls have remained flat over the  last five quarters. Going forward,  we believe suburban malls, which are frequently patronized by residents living around the  vicinity  of  the  mall  will  continue  to  outperform  urban  malls  in  the  next  12 months.  On  the  other  hand,  as  the  performances  of  urban  malls  rely  heavily  on tourists  and  discretionary  spending  we  believe  there  will  be  limited  upside  in  this sector in the near future given an uncertain macro outlook.

Global factors to determine performance of industrial buildings. Uncertainties in the global economy and poor economic data for 3Q12 have led to a decrease in demand  for  industrial  space  among  export-sensitive  and  heavy  industries. However, on the back of strong support from the oil and gas, logistics, health and pharmaceutical industries, the demand for industrial space has remained relatively strong.  Going  forward,  with  28.24m  sq  feet  of  industrial  space  expected  to  be completed in 2012 ' 2013, we believe rental rates for industrial buildings to come under pressure if current economic conditions persist. However, given the resilient nature of industrial rental rates, we believe the correction in rental rates to be mild.

Rent  slide  but  expect  to  stabilize  going  forward.   YTD the rental spot rate for Grade  A  office  space  in  the  prime  district  of  Singapore  has  fallen  by  13.5%  to S$9.51  psf/mth.  Going  forward,  on  the  back  of  limited  new  supply  of  Grade  A office space in the prime district until 2H13,  we expect the downward adjustment of rental rate for this grade of office to stabilize amid a relatively strong absorption rate and the flight to quality by business owners.

High  hotel  occupancy  and  RevPAR  but  growth  slowing.  For  the  first  nine months of 2012, average occupancy rate (AOR) for Singapore hotels rose  0.2ppt YoY  to  86%,  while  revenue  per  available  room  (RevPAR)  rose  by  7.7ppt  YoY  to S$229.60.    Although  we  are  still  seeing  an  uptrend  in  this  sector,  the  rate  of growth has dropped significantly in recent months; with September posting a drop in both AOR and RevPAR by 3.0ppt and 1.8ppt from a year ago respectively. This is  mainly  attributed  to  a  cut  in  spending  by  corporates  as  the  outlook  of  the economy  continues  to  remain  unclear.  Going  forward,  although  we  remain confident of the tourism growth in Singapore, we believe hospitality REITs that has significant  dependence  on  corporate  spending  may  come  under  pressure  in  the imminent future.

Positive  on  REITs  despite  market  volatility.  Since  the  beginning  of  the  year, the  Straits  Times  Re  Invest  Trust  Index  (FSTREI  Index  -  an  index  which  tracks the performance of S-REITs) has risen by 32.0%, outperforming the STI (+12.7% YTD).  Going  forward,  as  the  Singapore  dollar  continues  to  remain  strong, coupled  with  volatility  in the global market and  negative real interest rates (after taking  inflation  into  consideration),  we  expect  REITs  as  a  sector  to  remain positive.

High  liquidity,  low  risk  appetite  drives  REITs.  As  the  QEs  from  central  banks across  the  globe  continue  to  pump  money  into  the  economies,  we  expect  the liquidity of the markets to remain high in the near term. Since the beginning of the year,  the  global  macro  picture  has  remained  uncertain, leading  investors  to seek safe haven investments and high yielding counters. This investment approach has driven  government  bonds  in  most  countries  to  historically  low  levels  while  at  the same  time  REITs,  which  are  commonly  seen  as  a  defensive  sector  with  high yields have been pushed towards historical averages.

10-year  governmental  bonds  have  been  compressed.  As  Singapore  continue to  remain  as  one  of  the  few  countries  globally  with triple 'A' credit  rating,  the demand  for  Singapore's government  bonds  has  compressed  interest  rate  of  10 year  bonds  to  a  historical  low  of  1.3%.  As  a  result,  despite  the  rally  of  S-REITs' share  price  since  the  beginning  of  this  year,  the  average  12-month  forward dividend yield spread of the S-REITs sector is currently still trading above the long term average.

Improving  global  economy;  but  not  enough.  Although we have seen a slight improvement in the global macro sentiment in recent weeks, further global issues such  as  the  impending  US fiscal cliff, China's uncertain economy and the debt crisis  in  Europe  continue  to  weigh  down  the  recovery  of  the  global  economy. Going  forward,  until  a  clearer  outlook  on  the  global  economy  is  available;  we believe  investors  will  continue  to  remain  cautious,  favouring  companies  that provide strong earnings, stable payouts and high dividend yields.

Macro factors provide possible room for further yield compression. Given a prolonged  low  interest  rate  environment  coupled  with  global  uncertainty,  we believe the chase for dividend  yield plays  will continue to remain relevant  in the near future. Currently, the average 12-month forward dividend yield spread of the S-REIT sector is c.50bps above the  long term average of 410bps;  leading us to believe that there is room for further yield compression.Cheap borrowing cost to spur purchase/development of properties.  Besides taking advantage of the low borrowing costs to refinance past debt, the prevailing low  interest  rate  environment  will  also  encourage  S-REITs  to  strengthen  its balance sheet for future acquisitions of more investment properties.

Earnings  continue  to  grow  at  a  healthy  rate.  During  the  latest  quarter  result announcements,  most  (except  for  a  selected  handful)  REITs  announced  stellar earnings,  including  higher  NPIs  and  DPU  on  a  year  on  year  basis.    The  REITs under  our  coverage  posted  on  average  +4.7%  YoY  and  +6.1%  YoY  growth  in NPI and DPU respectively. If Suntec REIT was stripped out (a drop in DPU in the last quarter due to the AEI at Suntec City), average NPI and DPU growth came in at a respectable 8.1% and 8.0% respectively.

Rising  risks  in  capital  raising  and  compulsive  acquisitions.  Although  we continue to maintain OVERWEIGHT on the S-REITs sector, we see rising risks of further capital raising activities in the near future. As trading valuations continue to remain  high,  with  most  of  the  S-REITs  trading  10%  premium  to  book  value, accretive  acquisitions  can  be  made  much  easier  than  before.  However,  given  a high  valuation  and  compressed  cap  values,  some  of  the  REITs  could  end  up overpaying  or  venture  into  unchartered  territories  overseas.  Due  to  this  reason, REITs with good corporate governance, strong balance sheet and track  record is preferred. Although we continue to maintain our overweight in the S-REITs sector, we  are  also  becoming  more  cautious  in  relation  to the  counters  that  we  deem  to
have further upside.

Prime suburban malls to outperform urban malls.  According to data compiled by  CBRE,  spot  rents  of  both  prime  and  suburban  malls  have  remained  flat  over the  last  five  quarters.  Going  forward,  we  believe  suburban  malls,  which  are frequently  patronized  by  residents  living  around  the  vicinity  of  the  mall  will continue  to  outperform  malls  in  the  next  12  months.  On  the  other  hand,  as  the performance of urban malls rely heavily on visitors and discretionary spending; we believe  there  will  be  limited  upside  in  this  arena  in  the  near  future  given  an uncertain macro picture.

FCT  continues  to  shine.  Frasers  Centrepoint  Trust  (FCT)  reported  a  4QFY12 DPU  of  2.71S''  (+15.3%  YoY).  Together  with  the  dividend  distributed  in  the  first 3Q of FY12, total  DPU came in at 10.01S'' (+20.3%  YoY). Revenue for 4QFY12 grew  to  S$39.0m  (+14.3%  YoY)  while  net  property  income  rose  to  S$28.7m (+13.7%  YoY).  These  strong  growths  were  mainly  attributed  to  respectable contributions  from  Causeway  Point  (CWP),  full  year  contributions  from  Bedok Point  and  positive  growth  in  all  other  malls.  Going  forward,  we  expect  FCT  to continue  to  register  stronger  numbers  on  the  back  of  1)  increased  contributions from  CWP  as  average  occupancy  and  rental  rates  continue  to  pick  up  from  its lows  during  the  initial  stage  of  AEI  and  2)  positive  rental  reversions  in  suburban malls  to  continue.  Given  the  clear  growth  catalysts  together  with  the  potential  to acquire Changi CityPoint in FY13, we believe FCT (BUY; TP:S$2.10) will continue to outperform its peers going forward.

CMT  to  benefit  from  the  popularity  of  its  malls.  CapitaMall  Trust  (CMT) reported 3Q12 DPU of 2.42S'' (unchanged YoY). Revenue for this period grew to S$167.2m (+5.1% YoY) while net property income rose by 4.3% YoY mainly due to an  increase  in contribution from JCube and  Bugis+. Going forward,  we expect CMT  to continue  to register  strong  numbers  on  the  back  of  1)  contributions  from JCube  and  Bugis+  which  was  opened  in  April  and  August  2012  respectively;  2) additional income contribution from the AEI at Orchard Atrium which is scheduled to be completed in 4Q12 and 3) the repositioning of IMM as a value-focused mall with about 30 outlet brands expected to be operational by end- 2012. In addition, CMT recently announced an impressive pre-commitment rate of near to 50% of its Westgate  mall  -  a  year  before  its  opening,  commanding  rents  of  S$16-S$18 psf/mth.  Given  the  outperformance  of  its malls,  we  continue  to favor  CMT  with  a BUY rating and a DDM based (COE: 7.2%, terminal growth: 2.0%) TP of S$2.27.

Capital  values  of  industrial  properties  shot  through  the  roof.  The  capital values  of  industrial  buildings  have  risen  an  impressive  32%  YTD  on  the  back  of strong  interest  in  this  sector  as  a  result  of  the  Additional  Buyer  Stamp  Duty, introduced  in  December  2011.  Since  the  introduction  of  ABSD,  foreign  and corporate investors will have to pay an additional 10% stamp duty when buying a residential  property  in  Singapore.  As  a  result,  investors  shifted  their  focus  to  the unregulated industrial properties instead. Although, Singapore government tried to suppress  the  growth  in  capital  values  of  this  class  of  assets  through  increasing supply by selling parcels of land with a shorter lease and monitoring the purpose of  use  in  these  buildings,  it  has  failed  to  control  the  capital  values  effectively. Going  forwards,  with  the  continual  rise  in  capital  values,  the  risk  of  further governmental regulations on industrial properties have increased significantly. 

Rental  of  business  and  science  parks  expected  to  come  under  pressure going forward. With a high supply of Business and Science Parks of 1.43m sq ft and  1.78m  sq  ft  in  FY13  and  FY14  respectively;  coupled  with  a  relatively  weak pre-commitment rate of 39.3% and 15.2% respectively,  we  expect the rental rate of this asset class to come under pressure in the near future.

Global  factors  to  determine  performance  of  industrial  buildings. In addition, uncertainties  about  the  global  economy  and  poor  economic  data  for  3Q12  have led  to  decreased  demand  for  industrial  space  among  export-sensitive  and  heavy industries. However, on the back of strong support from the oil and gas, logistics, health  and  pharmaceutical  industries,  the  demand  for  industrial  space  has remains  relatively  strong.  Going  forward,  with  28.24m  sq  feet  of  industrial  space expected  to  be  completed  in  2012  '  2013,  we  believe  rent  rates  for  industrial buildings  to  weaken  if  current  economic  conditions  persist.  However,  given  the resilient nature of industrial rental rates, we believe the correction in rental rates to be relatively mild.

AREIT  likeable  but  fairly  valued  as  of  now.  Ascendas  REIT  (A-REIT) possesses high quality  industrial assets but is trading at high  premium.  Although we like A-REIT (NEUTRAL; TP S$2.67) for its high quality assets, we think that it is  currently  fairly  valued  due  to  a  lack  of  clear  growth  catalysts  in  the  next  12 months.  Going  forward,  we  expect  AREIT  to  experience  limited  growth  in  DPU, mainly  from  1)  additional  contribution  from  the  new  properties  acquired  and  2) positive  rental  reversion  contributed  by  low  rates  due  for  renewal  in  the  coming quarters. Currently, AREIT is trading at 1.28x P/B and a FY13 forecasted dividend yield  of 5.9%. In the face of these valuations,  we  maintain our NEUTRAL call on AREIT with a DDM based (COE: 7.8%; TGR: 2.0%) TP of S$2.67.

CIT to continue to grow through acquisitions in the near term. During the last quarter,  CIT  announced  a  strong  set  of  results  posting  gross  revenue  and  net property  income  of  S$22.5m  (+8.5%  YoY)  and  S$19.2m  (+8.9%  YoY) respectively.  The  increase  in  revenue  is  mainly  attributed  to  additional contributions from the acquisitions at 16 Tai Seng Street, 25 Pioneer Crescent and 3C Toh Guan Road East. DPU for the quarter came in at 1.204S'' (+11.3% YoY). Going  forward,  we  expect  CIT's  DPU  to continue  to remain  strong  from 1) additional  contributions  from  its  acquisitions  including  the  recently  acquired properties  at  11  Woodlands  Walk  and  30  Marsiling  Industrial  Estate  Road  8;  2) resilient  industrial  rental  rates  coupled  with  average  security  deposits  of  12.5 months; 3) new contribution from the BTS project at Tuas View Circuit which was completed  in  August  2012  and  4)  future  AEIs  and  acquisitions  in  the  pipeline. Given  its  bright  prospects,  we  believe  Cambridge  Industrial  Trust  (BUY;  TP S$0.75) offers the greatest upside potential and attractive dividend yield within our industrial REIT coverage space.

Rent slide but expect to stabilize going forward.  According to CBRE, YTD the rental  spot  rate  for  Grade  A  office  space  in  the  prime  district  of  Singapore  has fallen  by  13.5%  to  S$9.51  psf/mth.  These  corrections  in  office  rental  rates  fell within  our  expectations,  where  we  have  previously  forecasted  a  drop  in  Grade  A office  rents  by  10-15%  during  2012.  Going  forward,  on  the  back  of  limited  new supply of Grade A office space until 2H13, we expect the downward adjustment of rental  rate  for  this  grade  of  office  to  stabilize  amid  a  relatively  strong  absorption rate while witnessing some business owners to a flight to quality.

Room  for  positive  rental  reversion  amid  a  difficult  market.  In  terms  of  the REITs space, we believe some of the office REITs will be able to achieve positive rental  reversion  in  2013;  mainly  due  to  the  renewal  of  leases  that  were  signed back  in  2009,  in  the  midst  of  the  post  Lehman  crisis  period.  During  the  trough period  in  4Q09  and  1Q10,  Grade  A  office  rental  rate  hit  a  low  of  S$8-8.10.  As compared to today's rental spot rate of S$9.51, some  of  the  REITs  may  have room to increase their rental rate by as much as 15-20% in 2013.

BUY  on  CapitaCommercial  Trust  (CCT)  due  to  room  for  growth.  After reporting a stellar results in 3Q12, mainly attributable to revenue contribution from the  acquisition  of  Twenty  Anson,  higher  rental  income  from  HSBC  Building, Capital  Tower,  Golden  Shoe  Carpark,  Bugis  Village  and  higher  yield  protection income  for  One  George  Street.  Going  forward,  we  believe  CCT  will  continue  to grow on the back of additional contribution from Twenty Anson and positive rental reversion  from  leases  that  will  expire  in  2013  (19.6%  of  gross  rental  income). Currently, CCT's average passing rent for  the  leases  to  expire  in  FY13  is  at S$7.64  psf/mth.  As  compared  to  the  market  rate  of  S$9.51  psf/mth,  we  believe CCT is currently well positioned to capture potential rental upside when its leases expire  in  FY13.  We  maintain  our  BUY  recommendation  on  CCT  with  a  DDM based (COE: 7.8%, TGR: 2.0%) TP of S$1.77.

Suntec  REIT  (SUN)  upgraded  to  BUY  despite  reduction  in  DPU.  During  the last  quarter,  Suntec's  results  have  suffered,  posting  a  gross  revenue  and distributable  income  of  S$62.6m  (-7.8%  YoY)  and  S$52.8m  (-6.3%  YoY) respectively.  This  was  mainly  attributable  to  the  loss  in  income  from  the divestment of CHIJMES and the commencement of the AEI  work at Suntec City. Going forward, given a clearer outlook on the effect of Suntec City's AEI on the trust's income coupled with a higher than expected pre-commitment rate of 71.2% of the upcoming space at  Suntec City,  we are positive on  the future of SUN  and upgraded our rating to BUY with a revised TP of S$1.80.

FCOT  continues  to  remain  as  our  top  pick  in  office  sector.  Among  our coverage  of  the  integrated  office  sector,  our  top  pick  remains  with  Frasers Commercial Trust (FCOT). FCOT reported 4QFY12 DPU of 1.75S'' (+15% YoY). Revenue  and  net  property  income  for  last  quarter  came  in  at  S$35.6m  (+17% YoY)  and  S$26.5m  (9%  YoY)  respectively.  This  was  mainly  attributable  to  the additional income contribution from the additional 50% stake in Caroline Chisholm Centre  and  the  one-off  gain  of  S$72.8m  from  the  divestment  of  KeyPoint. Recently,  FCOT  has  also  divested  its  three  properties  in  Japan.  By  doing  so, coupled  with  the  proceeds  from  the  divestment  of  KeyPoint,  gearing  has  been pared down to a healthy level of 28.6% (vs 36.8% previously). Going forward, with S$198.3m of proceeds left, we believe FCOT will  most likely redeem a portion of its CPPU, which is currently giving out an annual  yield of 5.5%. Given FCOT low gearing, high occupancy rate of 94.9%, AEI at China Square Central and a strong Australia portfolio, we continue to favor this trust for its attractiveness and maintain our  BUY  rating  on  FCOT  with  a  DDM  based  (COE:  7.9%;  TGR:  1.0%)  TP  of S$1.410

Singapore's tourism boom to continue. According to Singapore Tourism Board (STB),  tourist  arrivals  in  Singapore  are  set  to  grow  at  7.9%  CAGR  during  2010-2015 to hit 17m, underpinned by the attraction of the two Integrated Resorts. For 2011,  STB  is  expecting  12-13m  tourist  arrivals  (3-12%  YoY  growth).  Given  the bright outlook in the next few years, hospitality players are set to reap reward from the surge in tourist arrivals.

High  hotel  occupancy  and  RevPAR  but  growth  slowing.  For  the  first  nine months of 2012, average occupancy rate (AOR) for Singapore hotels rose 0.2ppt YoY to 86%, while revenue per available room (RevPAR) increased by 7.7ppt YoY to  S$229.60.    Although  we  are  still  seeing  an  uptrend  in  this  sector,  the  rate  of growth has dropped significantly in recent months, with September posting a drop in  both  AOR  and  RevPAR  by  3ppt  and  1.8ppt  respectively.  This  is  mainly attributed  to  a  cut  in  spending  by  corporates  as  the  outlook  of  the  economy continues  to  remain  unclear.  Going  forward,  although  we  remain  confident  of Singapore's  tourism  growth,  we  believe  hospitality  REITs  that  has  significant dependence on corporate spending will be affected in the imminent future.

CDL-HT  reasonably  priced  considering  the  multi-year  growth  story.  In  this latest  reporting  season,  we  witnessed  CDL-Hospitality  Trust  posting  a  weaker quarter  with  gross  revenue  and  NPI  coming  in  at  S$36.1m  (-0.8%  YoY)  and S$33.6m  (-1.1%).  The  drop  in  earnings  were  mainly  attributed  to  slightly  lower RevPAR  (-0.9%  YoY)  as  a  result  of  weaker  macroeconomic  environment impacting  both  Singapore's economy and hospitality sector. In addition, the fixed rent contribution from the Australia Hotels in  3Q12  was also slightly lower than  a year ago on the back of foreign exchange losses arising from a weaker Australia dollar. Going forward, as CDL-HT rely heavily on corporate spending (c.65-70% of total earnings), with a weaker global sentiment and outlook, we are currently less optimistic  on  the  outlook  of  CDL-HT  despite  the  upcoming  festive  season  and have  downgraded  our  call  on  CDL-HT  to  NEUTRAL  with  a  lowered  DDM  based (COE: 9.2%, TGR: 2.0%) TP of S$2.00. 

Source: OSK