Interest rate-related volatility may lead to capital flight from S-Reits: Credit Suisse

A RETURN to risk-on mode or interest rate-related volatility may result in capital flight from the Singapore real estate investment trust (S-Reit) sector. If this happens, it would be a better opportunity to buy Reits, compared to the current situation where valuations are expensive, a Tuesday Credit Suisse report said.

Singapore Reits (S-Reits) have underperformed property developers over the past three months. They have also seen more analyst rating downgrades following their Q4 2014 results, compared to the previous quarters.

Their disappointing performance and outlook are largely due to their expensive valuations and more subdued growth expectations for their distribution per unit (DPU), said Soek Ching Kum, head of Southeast Asia research at Credit Suisse.

She sees investment interest in the Reit sector cooling further in the run-up to the first Fed rate hike expected in June.

To be sure, the impact on DPU in 2015 and 2016 will be "modest": a 25 basis-point rise in short-term rates will have a less than 2 per cent impact on DPU as a result of more costly debt refinancing. But the "unsupportive valuations" will create "a bigger sentiment overhang on the sector", she said.

Reits are currently trading at a "not compelling" average 2015E yield of 5.9 per cent, representing a spread of 3.5 per cent over the 10-year Singapore bond yields.

Ten-year Singapore bond yields have recently risen to 2.4 per cent, from a low of 1.8 per cent in January.

And with growth becoming more constrained - as acquisition options are restricted by high asset prices in Singapore, and there are less opportunities for major asset spruce-ups - Ms Kum believes there is limited room for capital appreciation from the current valuation levels.