Analysts say time to take profits on office Reits

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Analysts say time to take profits on office Reits

THE prospects are dimming for Singapore's office real estate investment trusts (Reits) and investors should cash in their gains, according to BNP Paribas analyst Chong Kang Ho. Mr Chong said in a report: "We believe it is time to take profits on office Reits."

He pointed to various weaknesses in the sector, including a slow appreciation of the Singapore dollar, rising interest rates and higher business costs stemming from manpower difficulties.

They all combine to effectively reduce the demand for office space and, by extension, dividends paid out to investors. Although the report on Wednesday predicted a 10 per cent year-on-year increase in office rents, Mr Chong warned that an increase in the supply of offices in the central business district next year would further generate pressures on leasing.

Speculation about rents and interest rates are also reflected in a Credit Suisse report published on Tuesday, which expected office rents to peak this year.

Credit Suisse's head of South-east Asia research for private banking and wealth management, Ms Kum Soek Ching, noted that Reits have already been underperforming property developers in the past three months. "After the fourth quarter reporting season, we saw more analysts rating downgrades for Singapore Reits compared to any of the previous few quarters."

Mr Chong also cautioned about industrial Reits due to "the pressure on occupancy, as these Reits convert their assets from single-user to multi-tenanted ones". However, not all is lost for Reits as an investment option. Mr Chong looked towards the extension of Monetary Authority of Singapore (MAS) incentives for Reits announced in this year's Budget as a possible mitigating factor.

For the next five years, Reits can continue to enjoy income tax and GST concessions, even as stamp duty concessions lapse at the end of this month. As Ms Kum pointed out, these concessions have a mere 3 per cent impact on the price of a domestic acquisition.

Furthermore, a lift in tourist arrivals due to the South-east Asian Games in June could boost Reits. Mr Chong noted that the increased consumption revenue will allow the income of hotel and retail mall Reits to remain robust. Ms Kum said: "We still see Reits outperforming the market on a total return basis over the next 12 months given the stable cashflow business model, but (we) recommend adding new exposure to the sector on a correction."

hphyllis@sph.com.sg

By Phyllis Ho
The Straits Times - Money
Published on Mar 14, 2015 1:07 AM