Singapore Reit - Yield spreads highlight poor growth prospects

High yield spreads, as a consequence of low risk-free rates and historical DPUs (ie, current distributions are underpinned by rents that have yet to fully revert to market), appear to be encouraging investors to re-visit REITs. We see such spreads as indicative of the lower growth prospects facing asector that will continue to be dogged by negative reversions and asset revaluation deficits, rather than as flashing compelling value.

Net take-up in the CBD was a surprisingly low negative 550,000sf in 1Q09. With the demand outlook weakening, vacancy is likely to rise faster and remain higher for longer than expected, suggesting a drawn-out recovery.

Retail sales in 1Q09 (ex motor vehicles) fell 6.6% y-y, with tourist arrivals down 13.8% in 1Q09. Following a cut in our FY09 GDP forecast to -7.3%, our economics team continues to stress the risk for disappointment from private demand as consumption patterns are impacted by feedback loops from negative wealth effects and a worsening labour market. Operating conditions are likely to remain challenging for Singapore’s retail landlords.

With manufacturing output off 26.1% y-y in 1Q09, double-digit declines in production in most sectors (ex biomedical) suggest industrial landlords will face declining rents and, ultimately, downward pressure on asset prices.

We retain our core rent and yield assumptions, and roll forward asset valuations to FY10F. We continue to see value in the office sector — BUY CCT — though valuations prompt us to cut Mapletree Logistics Trust to REDUCE and Starhill Global REIT and Suntec to NEUTRAL.

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