Published June 10, 2009

UOB-Kay Hian calls a buy on FCT, A-Reit and K-Reit

Bullish take is based on lower inflation, refinancing risks

By JOYCE HOOI

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ALTHOUGH real estate investment trusts (Reits) remain dogged by falling rents, the latest UOB Kay-Hian report is bullish - with 'buy' calls on Frasers Centrepoint Trust (FCT), Ascendas Reit and and K-Reit Asia.

The report, which rates the sector 'overweight', cites lower inflation and lower refinancing risks as reasons for the optimistic take on Reits.

'Current yield spread (between Singapore Reits and 10-year government bonds) is 3.6 per cent, higher than historical average of 3.22 per cent,' says UOB-Kay Hian analyst Jonathan Koh.

'We expect yield spread to contract further due to normalisation in the credit markets. Refinancing risk has abated with partial resumption of lending activities in the local banking industry.'

Last month, CapitaCommercial Trust and Suntec Reit announced that they had secured respective loan facilities of $160 million and $825 million, freeing them from refinancing anxiety in the short term.

Something else that Reits can expect respite from is being trumped by much higher Singapore government bond yields, like they were last June. To compound matters, the June 2008 consumer price index hit a high of 7.5 per cent and crude oil prices peaked at US$145.29 a barrel the month after.

'With economic growth remaining lacklustre on a worldwide basis, we believe a repeat of the episode in mid-2008 is unlikely, at this stage,' Mr Koh says in UOB-Kay Hian's June 8 report. While he expects inflation to be more severe in the US - indicated by the further steepening of the yield curve on US Treasury Bonds by 30-49 basis points in the first week of June - local Reits will be buffered from this, thanks to the strong Singapore dollar.

'The Singapore dollar has strengthened 5.5 per cent from 1.52 to 1.44 against the US dollar so far in Q2 2009. While the US economy faces the risk of imported inflation, the same cannot be said of Singapore. The threat from inflation is more severe for the US economy due to a heavy dose of monetary and quantitative easing.'

UOB Economic-Treasury Research is projecting a CPI of -0.7 per cent for 2009 and 2 per cent for 2010 for Singapore.

Favouring 'laggard retail and industrial Reits', Mr Koh has issued 'buy' calls for FCT with a target price of $1.44 and Ascendas Reit with a target price of $1.93. For office Reits, the report picks K-Reit Asia, with a target price of $1.16.

FCT shares closed trading yesterday at 90 cents, Ascendas Reit at $1.56 and K-Reit at $1.01.