Life's tough all round at the moment, and Singapore is no exception, enduring its worst recession since independence in 1965. Salaries are being cut, working days reduced and GDP is heading for a fall of 5% this year. Yet expatriates, who flooded the tiny island state between 2004 and 2008, are staying put. Enrolments at international schools are steady and outbound flights are hardly batting people away. As one ex-hedge-fund manager tells Time: "This economic crisis is affecting every country. But if there is a glimmer of hope anywhere, it's here rather than in the US or UK." No more so than in the country's real estate investment trust (Reit) market.
Reits are listed companies that invest in a portfolio of properties, for example industrial units, offices and shopping malls. You can buy and sell shares in them like any other listed company, in return for which they manage the properties on your behalf and return the rent to you in the form of dividends. With property values across the world hit by the global recession, the 21 Reits listed on the Singapore Stock Exchange have seen their share prices tumble, and are now yielding around 15%, compared to the 4.64% yield you'll now get on a ten-year Singapore government bond.
That's a pretty punchy spread. Is it sustainable? Probably not. According to DMG Securities, dividend yields on Singapore Reits (S-Reits) could fall 3.4% this year as vacancy rates rise and rents fall. But that's not a disaster for every Reit. Rents are being cut on an individual basis, not across the board. So if a Reit has already locked in its rents (as many have), it will be able to sustain its dividends. What's more, the huge slump in the sector (share prices more than halved in the last six months of 2008) has left the average Reit trading at a 61% discount to reported net asset values (NAV the value of the underlying properties), said Meenal Kumar of OCBC Securities in a March report.
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Of course, the value of those underlying assets could fall further. But at those sort of yields, those S-Reits that can boast well-diversified asset bases and low debt levels look very good value. The top pick in the sector, according to Asian investment bank CIMB-GK Research, is the Ascendas-Reit, or A-Reit (SP:AREIT). Even with a 15% rise in vacancies, it's expected to sustain yields of 11% over 2010/2011, supported by a diverse portfolio of long-term sale and leaseback properties.
At current levels, the stock is priced as if the market expects vacancy levels to hit a high 40%. But that doesn't seem likely. The firm specialises in industrial properties, and with manufacturing still "the single largest driver of Singapore's GDP", the government has traditionally offered rental allowances to manufacturers facing tough times. So A-Reit is less likely to see its tenants go bust than rivals specialising in residential and commercial property. It also has low gearing (below 40%) and has "no major refinancing needs over the next two years" crucial in the current environment, where rolling over debt at a reasonable rate can be challenging.
For broader Asian exposure, Cris Sholto Heaton, who writes the MoneyWeek Asia email, suggests Ascott Reit (SP:ART). The group owns serviced residences across Singapore, China, Vietnam, the Philippines and Thailand. It may suffer as tourism in the region drops off, but with a 19% yield, the group has room to cut the dividend. Net gearing is 37%. CapitaLand, the government-controlled property group, is a major shareholder. That means that Ascott should have an easier time raising money if needs be than non-sponsored firms in the sector.
You can buy Singapore-listed stocks through several brokers, including TD Waterhouse and Barclays.
There's room for hope in Japanese Reitstoo
In common with most other markets, the Japanese Reit sector has had a rocky time. Of 13 failures among listed Japanese firms in 2009 so far, seven have been in the property sector. But there's room for hope. At the end of last month, the Japanese government announced plans to buy assets from the trusts and the Reit sector jumped 8.4% the next day.
They're not out of the woods by any means Japanese banks may not have dabbled much in US subprime, but the slump in the economy is putting them under severe pressure. If the banks decide they need to repair their balance sheets, then foreclosing on Reits even if they are still making their payments is a tempting option for a bank that wants to cut down on its outstanding risky loans. In this case, property assets are likely to be sold at firesale prices, with equity holders ending up with nothing.
However, at these levels, those Reits which survive will pay great returns to anyone buying them now. Just understand that this is a punt, not something to stake your pension money on. Pali International chief strategist James Ferguson suggests Nippon Commercial (JP:3229). The group is 100% invested in office and retail property, mostly in Tokyo, but also in Nagoya and Osaka. The stock trades on a p/e of three and yields about 25%. Even if falling rental values mean this is cut in half, that's still a yield of more than 10%.
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