Following upgrades by some of our peers on the grounds of “valuation support”, we would re-iterate our view that there is plenty more downside to play for in the Singapore REIT space. Although the sector has underperformed the Hong Kong REIT sector, this is not a surprise given average gearing levels are considerably higher.
- Despite recent share price moves, Valuations are still a long way off 2008 bottoms.
- Singapore swap rates (usually a very good lead indicator) are continuing their explosive rise.
- Current average locked in Debt yields are around 2.5% with average Net Debt to Equity of 50% (vs HK at 30%) and 43% of total debt rolling off within 19 months (vs 30% in HK and zero for the larger HK REITS); should swap rates spike up to more normal levels that could mean a locked in funding cost double what these REITs are currently enjoying.
- Best place in Asia to play rising US interest rate potential.
- Interest rates rising, hedging rates rising and rental yields falling – the perfect storm.
- In the short term there is little risk of a sustained bounce on valuation support given market concerns (let alone valuation levels) and there is real downside on an operational basis going forward.
Our top picks to SELL remain;
MINT Mapletree Industrial Trust - Highly geared with 82% of Debt rolling in 19 months. Mostly bank loans (1.61% indicative rate 91% swap hedged to fix). Expensive Book value.
KREIT Keppel Reit – Highly geared and high sensitivity to interest rate moves with 28% of Debt rolling in 19 months. Weighted ave current cost 2.2%. 22% of Debt fixed (1.9-3%), 37% covered by swaps with rest floating (0.75-1.9%+SOR).
SUN Suntec Reit – Highly geared and high sensitivity to interest rate moves with 39% of Debt rolling in 19 months. Effective total rate 3-3.65%
CRCT Capita Retail – small but high gearing with 100% of debt rolling off within 19 months. Current 2% effective rate, mainly floating but 65% swaps pay fixed receive variable. Mainly SHIBOR rates.
In general Singapore REITS although less expensive on most metrics they are significantly more geared (47% Net Debt/ Equity Vs 29% for HK) and have a riskier Debt profile with on average 42% of their debt becoming due in the next 19 months (Vs 30% in HK).
2778 HK Champion REIT – Less geared that Singapore peers but 97% of its Debt due within 19 months. 32% is convertible Bond due in 1 month. Rest term loan swap fixed to 1.17% effective rate mostly due within 19 months.
405 HK Yuexiu – Very highly geared with 31% of Debt due in 19 months. No swap contracts currently and fully drawn on all funding. 50% HK, 50% RMB debt.
