Counters worth noting include Allco Reit and Macquarie MEAG Prime Reit

THE Singapore real estate investment trust (Reit) market has become more developed since our last review in November 2005. Not only are there more Reit counters, there are now also more 'categories' of Reits available to investors. In 2006, six new Reits were added to the Singapore bourse, making a total of 13. Ascott's A-Reit and CDL's H-Reit, which were among the six, also created a new Reit category - the Hospitality Reit.

Reit prices have performed well since the listing of the first Reit, CapitaMall Trust (CMT), in July 2002. Between July 2002 and September 2006, our Reits index has improved by over 167 per cent and achieved a compounded annual growth rate (CAGR) of 32.4 per cent compared with the Straits Times Index's 60 per cent improvement and a CAGR of 15.5 per cent. Furthermore, the correlation of the Reits index to the STI was a low 0.22.

Dividend yield from these investments has been rewarding and volatility of such yields was also small. On average, Reits offered investors a dividend yield of about 5.7 per cent, with a fluctuation of only about 0.7 of a percentage point.

Does this mean that investors should jump on the bandwagon now? Not really. While prices of the 'pioneer' Reits, such as CMT, CapitaCommercial Trust (CCT), and Ascendas REIT (A-Reit) have increased at a phenomenal rate, current dividend yields have actually tumbled. To illustrate, CMT's dividend yield has fallen from 7 per cent at the beginning of July 2002 to just 4.4 per cent in September 2006.

Does this mean that Reits are overvalued? The answer is interestingly also 'no'. Comparing the initial and current dividend yields to the risk-adjusted required return (calculated from the sub-category indexes), we can see that the pioneer Reits initially offered investors dividend yields higher than the risk-adjusted required return.

In our Macquarie International Infrastructure Fund analysis report, we argued that investors add on unnecessary risk premium of between 50 per cent and 130 per cent over the risk-adjusted required returns when they are faced with new and unfamiliar investments. We call this additional risk premium 'apprehension discount'.

Of course, investors will remove this discount as they learn more about the investment over time and this could explain the exceptional increase in Reit prices over the last few years. Interestingly, we have also noticed prices of Mapletree Logistic Trust (MLT) adjusting downwards over the last few months - moving dividend yields towards its risk adjusted returns.

The above analysis implies that investors are now more apt at pricing most Reit instruments and that such prices efficiently reflect available information - with over and undervaluation minimised.

So, are Reits still attractive then? A recent report by JPMorgan suggests that S-Reits offer the highest yield gap compared with Reits in other bourses like Hong Kong, Australia, and even the US.

Real estate companies, such as Colliers International and Jones Lang Lasalle (JLL), have also reported strong growth in office rentals and strong demand for retail space. Colliers reported that average monthly gross rent of Grade A offices grew by a record 13.1 per cent in the second quarter of 2006, surpassing the 8.9 per cent growth rate in the first quarter of 2006; while JLL saw modest but consistent gains in Grade A retail rentals at an average rate of about 1.5 per cent quarter-on-quarter for the first two quarters of 2006. As for industrial land, strong rental growth is seen only in the high-tech industrial sector.

Furthermore, risk free rates - proxied by the three month inter-bank rates - have also stabilised at about 3.5 per cent in recent months, which will reduce the stress of yield crunch on Reits.

S-Reits, therefore, seem attractive at this juncture and dividend yields look fair. While the average commercial and retail category Reits offer returns close to their required returns, there are some counters worth noting like Allco Reit and Macquarie MEAG Prime (MMPrime) Reit which offer investors opportunities to lock in good returns at current prices. Investors should also note that hospitality stocks' returns are lower than the required returns. This signifies two possibilities - potential growth or overoptimism in value.

Do take note again that Reits are not risk-free investments. Look closely at the quality of the management and the assets under the Reit and assess if the investment is worth the risk.

JUST about all the private and public sector leaders in town recently for Singapore 2006 were bullish about Asia's prospects.

Certainly, last week's military coup in Thailand serves as a timely reminder that when it comes to Asia, things will not always be smooth sailing. Still, there is little doubt that the stage is set for global investors to sink even more money into Asia, be it in equities or real estate. Investors will want ever-more exposure to the world's fastest growing region.

One of the biggest success stories in Singapore's capital markets in recent years is the growth of the real estate investment trust (Reit) market. This market, which is just over four years old, has 13 Reits owning properties in different asset classes, and a combined market capitalisation in excess of $16 billion.

The sector's market cap will keep growing as new trusts come on stream and existing ones acquire more properties. Regionalisation could be the next big theme in the Reit market, with existing Reits acquiring overseas assets and Reits of overseas assets getting listed here.

Demand from investors for Reits appears insatiable. They gave a warm reception to last month's equity fund-raisings by CapitaCommercial Trust and CapitaMall Trust of $803 million and $401 million respectively.

Growth can be accelerated with a good pipeline of new Reits. Besides regionalisation, a major growth driver could come from big privately owned property groups in Singapore actively embracing Reits.

Sweet success

Tycoon Kwek Leng Beng has already savoured the sweet taste of Reit success with his CDL Hospitality Trusts, which is up almost 20 per cent from its initial public offer price. This is an impressive performance for a largely hotel Reit, given that earnings from this asset class tend to be volatile. More Reits in other asset classes from Mr Kwek, please?

More critically, perhaps Mr Kwek's positive Reit experience will spur other major property-owning families here to launch Reits. So far, growth in the sector has been driven largely by entities linked to Temasek Holdings and the Singapore government. It is timely for private enterprise to lend a hand.

Think of tycoons like Wee Cho Yaw who controls UOL Group, which has attractive retail and office assets. And perhaps the family of Robert Kuok, which controls Allgreen Properties, might consider injecting properties like Great World City and Tanglin Mall into a Reit?

Tycoons owning properties through privately held entities may also wish to recycle capital by selling assets into Reits. The Ng Teng Fong family and the Shaw family, for example, own some prime retail assets.

Potential players

One party with particularly attractive assets is the Kwee family of Pontiac Land Group, whose portfolio includes office assets Millenia Tower and Centennial Tower, retail asset Millenia Walk, healthcare asset Camden Medical Centre and hotel assets The Ritz-Carlton Millenia Singapore, The Conrad Centennial and The Regent Singapore.

But a bigger growth driver could come from the government doing even more to promote Reits - divesting real estate assets into Reits. How about JTC Corporation doing a mega industrial Reit to pave the way for other statutory boards and agencies?

For example, HDB could put retail shops and car parks into a Reit. And what about divesting into Reits properties occupied by educational institutions, headquarters buildings of ministries and statutory boards, and sports and community facilities? Singapore can be bold in expanding the property asset classes that go into Reits.

Perhaps the government should, where possible, consider divesting property assets unless public ownership is of critical national importance.

Of course, the government is cash-rich. But think about it this way, investor demand exists for Reits and investors like the Singapore Reit framework, so the ingredients are in place for Singapore to be a truly leading Reit hub.

Properties owned by Reits tend to be more actively managed, with their yields optimised. An active Reit market can help grow the local fund management industry, increase trading on the Singapore Exchange and boost capital market activities here.

The time is right to put even more properties here into Reits - and thereby enhance the breadth and depth of Singapore's market.

Good performance stems from the rise in the 10-year government bond yield

SINGAPORE'S growing real estate investment trust (Reit) sector has proved resilient despite rising interest rates, which theoretically make investment instruments that are bought for their yield - like Reits - less attractive. Five out of seven Reits that have been around since last year are currently trading at levels higher than at the beginning of this year.

Of the four Reit initial public offerings (IPOs) this year, two are trading above their IPO price while two are trading below it.

Even the worst performer among this year's Reit IPOs - Allco Commercial Reit - has started to see its unit price improve and is currently trading around 15 per cent higher than in early July. Credit Suisse, which has an 'outperform' on Allco Reit, sees the Reit's China Square Central benefiting from Singapore's rising office rental market.

Market players say the resilience of Singapore's Reits stems from the rise in the 10-year government bond yield - against which yields from Reits are often compared - being fairly moderate, and the upward movement of capital values and rents across various segments of the physical property market here. The 10-year government bond yield is currently around 3.4 per cent, compared with around 3.2 per cent at the start of the year.

The prime office and Orchard Road retail segments of the Singapore property market are particularly buoyant. Reits owning prime office assets like CapitaCommercial Trust (CCT) and K-Reit Asia, a mix of prime office and retail assets like Suntec Reit, and Orchard Road retail malls like Macquarie MEAG Prime Reit (MMP) are seen as beneficiaries of these positive trends in the physical property market.

But as much as the bullish sentiment in the physical property market is supporting the prices of Reits, the positive effects of this are manifested even more in the share price performance of property companies. So far this year, the share prices of big developers like CapitaLand and Keppel Land are up 30 per cent and 22 per cent respectively. The share prices of smaller developers like Bukit Sembawang Estates and SC Global are up 55 per cent and 49 per cent respectively. In fact, the share price performance of many developers outpaces that of the better-performing Reits as the positive physical price market means developers can book sizeable profits from development projects.

Some investors are buying into property companies on the back of improving prospects for the Singapore residential market - a segment that Reits are not exposed to. Here, recovery has been led by the top end of the market, with the big question mark being how fast and far down it spread to other parts of the market.

As for the Reit market, players say it is a relatively young one in which acquisition opportunities exist. Equity raisings by Reits to fund acquisitions continue to attract a good investor response.

CCT's raising of $803 million to help finance its acquisition of a 60 per cent interest in Raffles City has been well received by investors. Last Thursday's ATM offering by CCT of 15 million new units at $1.68 per unit, on a first-come first-served basis, was snapped up within five minutes. Many retail investors, who queued up unsuccessfully to apply for units in CCT, were disappointed and are clamouring for a larger ATM tranche to be offered in future.

Market players say the frenzy for Reits shown in the IPOs of Mapletree Logistics Trust and what is now called MMP, which closed in July and September 2005 respectively, may never be repeated, but note that investor appetite for quality Reits remains strong. The public offer tranche of the IPO of MLT drew 35,237 applicants and was 41.5 times subscribed, while that of MMP drew 27,876 applicants and was 23.8 times subscribed.

In the current climate, CapitaMall Trust (CMT), which is expected to raise equity shortly to help fund its share of the purchase of Raffles City, should meet with a good investor response, players say. CMT is unlikely to see its forthcoming equity offering under-subscribed, as was the case when it raised equity in October last year to help fund the purchase of Parco Bugis Junction and three other properties.

Looking ahead, the good times in the physical property market here will drive the performance of property companies and Reits. Among Reits, those trading at competitive yields are seen to be well placed to grow via accretive acquisitions.

But such Reits will have to contend with the risk of asset prices here spiralling upwards to levels that might make it difficult for Reits to make accretive acquisitions. Moreover, investors who think Singapore's physical property market is in the early stages of recovery may choose to invest in property developers rather than in Reits.

Sources expect it to sell its subsidiaries Ascendas and Jurong International Hldgs through trade sales

(SINGAPORE) JTC Corporation is expected to announce long awaited details of its divestment plans by the end of this month and sources expect the statutory board to divest a substantial amount of its industrial property portfolio into a real estate investment trust (Reit). Sources say the JTC Reit could contain assets worth between $1.5 billion and $2 billion, with the initial public offering (IPO) expected to be launched next year.

Meanwhile, sources expect JTC to sell its subsidiaries Ascendas and Jurong International Holdings through trade sales. Market players believe a sale of Ascendas is likely to attract strong interest from parties like Australia's Macquarie Bank as well as Middle Eastern investors, who are flush with cash and keen to control a vehicle that can be used to tap into infrastructure development opportunities in the Middle East. Macquarie Goodman has a joint venture with Ascendas, to manage Ascendas Reit.

Ascendas is Asia's leading provider of business space solutions, with a pan Asian presence covering Singapore, China, India, Indonesia, Japan, Oman, South Korea, Thailand, the Philippines and Vietnam. Jurong International provides a comprehensive suite of design and build, consultancy and facilities management services.

JTC's industrial property portfolio being considered for divestment include 71 blocks of high-rise facilities, 800 units of workshops and three multi-tenanted business park buildings - The Synergy and The Strategy at International Business Park and The Signature at Changi Business Park.

When JTC first announced its divestment plans in November last year, it said the implementation plan for the divestment exercise would likely be finalised by the second quarter of this year. But sources say the timetable may have been put back to address concerns raised by some of JTC's small and medium enterprise (SME) tenants. These tenants have voiced concerns that rents would rise if JTC's properties are sold to a Reit. However, market players point out that whether JTC sells its properties to a Reit or to some other third party, JTC might no longer be as forthcoming in offering special rental rebates to help tenants tide over bad times.

Market players say the Reit route is the most viable for JTC to divest its industrial properties, given the number of properties involved. They also suggest that while financial investors may not be keen to back income streams coming from individual SME tenants, a Reit that bundles together many tenancies of different SMEs achieves the benefits of diversification.

Market players note it would be interesting to see what properties JTC leaves out of the Reit and to see how the Reit goes about choosing a manager. They point out that an IPO of a JTC Reit might see the trust being sold to institutional and retail investors with the government retaining no stake in it, like the Link Reit in Hong Kong. Market players add that the JTC Reit exercise would be closely watched, because its success or otherwise could determine whether chunks of properties held by various other government entities would find their way into Reit vehicles. For example, sources have identified the Housing and Development Board as potentially injecting its car parks and shop units into a Reit.

The implementation of JTC's divestment plans are likely to be at the top of the agenda for Ow Foong Pheng, who takes over as the statutory board's chief executive officer, from Chong Lit Cheong on Aug 1. Market players note that a JTC Reit would compete for investor monies, tenants and acquisitions with existing Reits like the Ascendas Reit as well as the Mapletree Logistics Trust and the soon-to-be-listed Cambridge Industrial Trust.

While Reits owning prime retail and office properties in Singapore offer investors upside exposure to rental renewals and new leases, the industrial property space in Singapore is seen as one which provides scope for growth through acquisitions as industrial entities may wish to divest their non-core assets.

Bangalore-based developer Embassy Group said to be planning to sell shares in the fourth quarter 

EMBASSY Group, an Indian developer whose buildings house the offices of Hewlett-Packard Co and AT&T Inc, is planning the first sale of an Indian property trust in Singapore, people familiar with the transaction said. Bangalore, southern India-based Embassy hired Goldman Sachs Group Inc and UBS AG to arrange the initial public offering of a real estate investment trust (Reits), the three people said, asking not to be identified before an announcement. Embassy, which hasn't decided on the amount to be raised, plans to sell shares in the fourth quarter, the people said.

Singapore's regulations and tax benefits are attracting Indian companies to list Reits here. India has yet to introduce legislation to support Reits, which pay no corporate taxes. Singapore accounts for 47 per cent of the Reit market in Asia outside of Japan and Australia.

'The authorities here will probably want to embrace any regional Reits that come here, but at the end of the day you have to deliver a Reit that gives you the right distribution yield,' said Olivier Lim, Singapore-based chief financial officer of CapitaLand Ltd, owner of three of the 10 property trusts listed in Singapore. 'When you talk about riskier markets, you need some premium.'

Chief executive officer Jitu Virwani, who set up Embassy Group about 20 years ago, didn't return calls made to his office in Bangalore or to his cellular phone. The company has an 11 million square-feet portfolio of prime residential and commercial space in India, according to Embassy Group's website. Its tenants include Hewlett-Packard, the world's second-largest maker of personal computers, AT&T, the largest US telephone company, and Oracle Corp, the world's No 3 software maker, the website shows. Embassy Group and other Indian real-estate developers are benefiting from faster expansion in Asia's fourth-largest economy. Easing of rules to allow foreign investment is generating demand for homes, office and retail space. Commercial and residential construction in India will surge to US$50 billion by 2010 from US$12 billion in 2005, a Merrill Lynch & Co report said last year. India's US$775 billion economy expanded 9.3 per cent in the three months ended March 31, the fastest pace since the quarter to Dec 31, 2003.

At least four Indian companies are 'looking to do Reits in Singapore', said Mark Ebbinghaus, Singapore-based joint head of real estate, lodging and leisure in Asia at UBS. He declined to name the companies or comment on Embassy Group's planned IPO.

The Right Processes' K Raheja Corp, which develops business parks, condominiums, malls and hotels in India, is studying the possibility of selling its assets through a trust in Singapore to free up capital for new projects that generate higher returns, said Vinod Rohira, the company's Mumbai-based director of sales and marketing. 'We want to list it in the domestic or international market,' Mr Rohira said in an interview. 'It will take six months to figure out the right processes and probably as much time to do it.'

Reits buy and manage properties from shopping malls to business parks. To retain tax-free status, trust laws require Reits to pay out most of their income, typically at least 90 per cent, in the form of dividends to shareholders. Singapore introduced its first property trust four years ago and the market's value has grown to about US$7.5 billion, the biggest in Asia outside of Japan and Australia.

Last year, the Singapore government cut its tax on dividends from property trusts for foreign investors to 10 per cent from 20 per cent. 'Singapore has emerged as a Reit destination,' Mr Rohira said. 'There are mature practices already existent, it's a good area to be able to access the rest of Asian markets, and there are synergies in which we believe Singapore is now conducive to investments in India.'

India's capital market regulator last week approved guidelines for real estate mutual funds, allowing them to invest directly in property assets in India. The funds can also invest in shares or bonds of listed and unlisted property companies, according to the website of the Securities and Exchange Board of India. 'That's a good sign because organised equity will come into real estate which will bring in better practices,' said K Raheja's Rohira. 'It will form a platform for working towards Reits.' - Bloomberg

INVESTORS are spooked by the damage that rising interest rates can do to the prices of real estate investment trusts (Reits). Reits are a hybrid between equities and bonds, providing investors with a stable stream of distribution income. Investors price Reits at a premium to the risk-free rate, being the 5-year or 10-year government bond yield. Everything being equal, an increase in the risk-free rate should lead Reit prices to fall by an amount which enables the yield to the investors to be preserved.

For a Reit trading at a yield of 6 per cent - which is where some Singapore Reits are trading at - this means that the price will fall by 4 per cent when interest rates increase by 0.25 of a percentage point. Investors are right to be concerned about the damage that rising interest rates can do to Reits. But in a climate of volatility and uncertainty in global equity markets where there is a danger of a sudden double-digit plunge in equity prices to reflect an increased risk premium in the market, Reits, relative to other equities, stack up well.

Interest rates may go up but the US Federal Reserve will, in all likelihood, hike rates at a measured pace. Meanwhile, a Reit trading at a yield of around 6 per cent gives investors a significant pick-up in yield compared with promotional fixed-deposit rates that are just north of 3 per cent. While interest rates may go up, so can Reit distributions. Historically, Reits here have posted growth in distribution per unit year-on-year in the high single digits or even in the double digits.

Singapore-sourced and Singapore dollar-denominated cash flows are highly valued by global investors because of the low-risk environment here and the strength of the Singapore dollar. These factors are also providing support for Singapore real estate as are the plans being implemented to make Singapore a better place to live, work and play.

There is little doubt that there are good times to come for owners of prime office and retail property in Singapore. On this basis, investors could do well to look closely at Reits that own such assets, an example being Suntec Reit.

With more new Reits coming on the Singapore market, investors have choice. New asset classes, new geographies and new structures will add to the depth of Singapore's Reit market. But amid choice, investors can stick to the property asset classes like office and retail, which are popular with Reits globally.

There is no need to consider hotels, as earnngs streams of such assets can be highly volatile.

There is no need to consider trusts that focus on sale and leaseback of facilities, as such Reits could be hard-hit should tenants fail as these properties are often purpose-built facilities where rents may have been propped up to achieve certain capital values.

As for Reits with overseas assets, Singapore investors can consider them only if they are adequately compensated for the currency risks and if the assets are appropriately priced vis-a-vis risk free rates in the respective countries, which almost invariably exceed that in Singapore.

There may be an ever increasing array of choices, but investors can do well by going for Reits with properties that are leased to independent third parties, located in Singapore and in the sectors that benefit from Singapore going up the ladder in the league of global cities.

Not surprisingly, Reits first emerged in the Singapore market a few years ago amid an environment of extremely low interest rates. With sufficient investor education, Reit prices then trended upwards substantially as investors appreciated the good yields they could get from Reits. Today, more sponsors see the value of launching Reits and Singapore continues to gain in popularity as a listing venue for Reits. But the spectre of rising interest rates looms as a major challenge to investors.

Let us not be unduly worried by rising interest rates but instead remember that Reits can be an excellent proxy for income streams from quality assets and focus on those Reits that offer such exposure.

BT, Published April 19, 2006

No change in tax for corporate Reit investors

Imposing a 10% final tax may actually work against local investors: MAS

(SINGAPORE) The current 20 per cent tax payable for Reit distributions received by local corporate or institutional investors stays, the Monetary Authority of Singapore (MAS) said yesterday.

Last month, Temasek Holdings chief executive Ho Ching called for a cut in the tax rate for local corporate investors on their Singapore Reit investments. Her views are shared by other players in the Singapore Reit industry, who agree that lowering the tax rate will create more depth and volume of local institutional investors putting money in the local Reit market. In addition, it will provide an incentive for the many family-controlled property groups here to spin off Reits.

'The authorities are probably concerned about loss of tax revenue,' a Reit market watcher suggested in reference to MAS's statement.

The tax rate on Reit distributions received by Singapore corporate investors is double the 10 per cent withholding tax which foreign corporate investors in Singapore Reits enjoy. Individual investors are exempt from paying taxes on Reit distributions.

Singapore Reits themselves do not pay corporate tax so long as they distribute at least 90 per cent of their distributable income to unit holders, under tax transparency rules structured to promote the setting up of Reits in Singapore.

MAS pointed out that the lower tax rate of 10 per cent on Reit distributions to foreign institutional investors is a withholding tax and hence a final tax, which spares them the hassle of having to file tax returns with the Inland Revenue Authority of Singapore (Iras) to claim expenses. In contrast, local institutional investors, although they are taxed at the corporate tax rate of 20 per cent, are able to claim expenses and deductions against their Reits' distributions in filing their annual tax returns.

'As a result when deductions are claimed, the effective tax rate borne by local institutional investors is lower than 20 per cent. Imposing a 10 per cent final tax on Reit distributions may actually work against local investors that are able to claim a significant amount of deductions from Iras,' MAS said.

MAS, which oversees and issues Reit guidelines, stressed that Singapore's tax treatment of Reit investors is currently the most competitive in Asia. 'Nonetheless, the government is keenly aware that this is an area of intense competition, and continually reviews the tax and regulatory regime to promote Singapore as the choice listing location for Reits,' it said.

Extracts fm Lim and Tan Report dated 10-Mar-06,

ALLCO COMMERCIAL REIT

More Aussie Than Singapore

• The new S-Reit will be priced between 98 cents to $1.02 each, to yield between 5.89-5.71% for period Mar 1st to end Dec ’06, annualized, and between 6.02-5.84% the following full year.
  
• Allco Reit will have total assets of $683.9 mln, more than half of which represents China Square Central, acquired from Straits Trading last September for $390 mln, which yields 4.5%. (China Square however accounts for 39.6% and 44.7% of Allco’s revenue and net income respectively.) (Under the deal, St Trading will lease back the property for 6 years, with an option for a further 6, at $17.55 mln per year; be responsible for $10 mln up-grading works; and making a $45 mln provision for any rental shortfall for the 6 year period, in the event the upgrading fails to produce the desired results.)
  
• The remaining assets of Allco Reit are in Perth, Sydney and Melbourne, which were all acquired last year.
  
• It is not known what the response from institutional investors has been.

CNA, Posted: 17 February 2006 1810 hrs

Singapore unveils measures to promote wealth management, treasury activities

The financial sector received a boost from the latest Budget statement announced in Parliament on Friday. The Budget unveiled by Prime Minister and Finance Minister Lee Hsien Loong included a slew of measures aimed at promoting the wealth management, capital market and treasury activities.

Among the measures are tax exemptions for Singapore REITs on foreign-sourced interest and trust distribution, and taxing Shariah-compliant financial products like conventional ones. To spur growth in the wealth management industry in the Republic, which has seen assets under management approach S$1 billion, the government will extend the Designated Unit Trust scheme to other types of funds. Qualifying domestic trusts and holding companies will be exempt from tax on both locally and foreign sourced income.

A new incentive scheme will also be introduced to exempt resident funds with foreign investors from tax.

The capital markets were given a boost too, starting with the REIT market. PM Lee said: "I will grant tax exemption on foreign-sourced interest and trust distributions received by REITs listed on the SGX (known as S-REITs). For S-REITs and their special purpose companies (or SPCs) set up to hold overseas non-residential properties, I will also allow recovery of GST incurred on the setting up of SPCs and the acquisition and holding of overseas non-residential properties by SPCs."

And for 5 years, there will be a 5 percent concessionary tax rate on clearing income for qualifying clearing members of Singapore Over-the-Counter or OTC derivatives clearing facilities.

The government is also recognising the huge potential of the Islamic banking market. To further promote this sector, the tax treatment of Shariah-compliant financial products will be aligned with conventional products.

And to spur the insurance industry, approved captive insurance companies will be granted tax exemption for 10 years. - CNA/ch

HIGHER interest rates will not spell the demise of Singapore real estate investment trusts (Reits), says OCBC Investment Research analyst Winston Liew in a recently released research report. Mr Liew argues that the bull run for Reits - some of which have behaved unlike yield instruments, with strong capital gains and high growth in distribution per unit - is not over. He upgraded the Singapore Reit sector from underweight to overweight.

The report comes as some market players note The Ascott Group's move to get its shareholders to pay for units in its soon-to-be-listed pan-Asian service residences Reit - Ascott Residential Trust (ART). Ascott is a subsidiary of Singapore Reit powerhouse CapitaLand. Previously, CapitaLand gave units in CapitaCommercial Trust (CCT) free to its shareholders via a distribution in specie. An industry player said: 'It does not make sense for Ascott shareholders to have to pay for what they already own.'

OCBC's Mr Liew points out that the two oldest Reits in Singapore, CapitaMall Trust (CMT) and Ascendas Reit (A-Reit), have made capital gains of around 142 per cent and 144 per cent respectively since listing. CMT and A-Reit have also seen their DPU grow by 47 per cent and 35 per cent respectively versus their forecast DPU at the time of initial public offering.

Mr Liew notes that over the last two to three quarters, the Singapore market has become belatedly concerned with the impact of rising interest rates on Reits. But he believes interest rate fears are unfounded as he does not see the market valuing Reits as yield stocks. He argues that as the assets of Reits are mainly properties, the best way to value Reits is via price-to-book (P/B) ratio. He points out that A-Reit, CMT and Mapletree Logistics Trust (MLT) have high P/B ratios of around 1.5 times or more and that the market perceives these Reits as 'high growth beta stocks' and is valuing them on 'strong growth through acquisitions'.

As to prospects of growth via acquisitions, Mr Liew believes that while competition for properties to acquire has intensified, some Reits are circumventing this by 'tying up with their sponsors/parents to warehouse properties'. What this means is that these Reits have a 'sustainable supply of properties', he argues. He points to MLT and Macquarie MEAG Prime Reit (MMP Reit) as standing out in this respect.

Mr Liew notes that to avoid fierce domestic competition for properties, some Singapore Reits are looking to acquire or have already ventured overseas. However, he points out that only two of the current seven listed Reits, MLT and CCT, have a stated objective to venture overseas. He believes that overseas properties should be acquired only if they provide a property yield premium of 1.5 per cent or more to equivalent Singapore property. He also notes that there is merit to the argument that 'investors should be given the option to decide their own geographical portfolios', particularly for Reits that were originally marketed at the time of listing as being Singapore focused.

He has buys on Suntec Reit and MMP Reit because of their low P/B ratios and MLT because of its prospects for growth via acquisitions.

K-Reit Asia, the proposed real estate investment trust, will have an initial portfolio of four KepLand office properties valued at S$630.7 million. They are: Keppel Towers, GE Tower, Bugis Junction Towers and the company's 44% share of the space at Prudential Tower.

All four properties are located in Singapore's central business district.

KepLand holders will each receive 200 K-Reit units for every 1,000 shares held, while the debt that will be assumed by the REIT means KepLand will get approximately S$190.6 million in cash for property development projects that are expected to generate higher returns, the company said.