Singapore-listed REITs

Real Estate Investment Trusts (REITs) invest in various types of property assets. First
introduced in 2002, these are relatively novel financial instruments. REITs distribute at least
90% of their income to unit holders in return for tax concessions from the Singapore
Government. The majority of REITs listed on the SGX invest in property assets pertaining to
hotels & lodging, industrial & office, residential, retail and healthcare. To the investor, REITs
provide an opportunity to own a share of a large and diversified portfolio without actually
owning property.
Current outlook on S-REITs
In September 2012, the FTSE ST REIT Index appreciated 27.70% in price with dividend
distribution of 6.35% in the year-to-date. The 34.70% total return of the FTSE ST REIT Index
outperformed the STIs total return of 19.36% over the same period. Over a 12-month
period ending 31 August, the REIT Index had been the least volatile, with half the volatility
of the FTSE Real Estate Holding & Development Index, based on a similar asset class
comparison.
Figure 1: FTSE ST Real Estate Index 10-month rally

However, investors may be

cautious about buying REITs,
given the rally over the past 10
months
(Figure
1).
The
performance of these dividend
stocks have soared roughly 30%
since the start of 2012.

Why REITs
The higher liquidity1 in the REITs market as compared to a typical property transaction is one
advantage in investing in REITs. SGX provides retail investors with a compendium of
different REITs specializing in different sectors, thereby providing inherent diversification of
portfolio.
Subject to strict regulations imposed by the Monetary Authority of Singapore, S-REITs offer
better transparency and corporate governance that many other corporate sectors. As such,
REITs tend not to experience high volatility as compared to other ST-indexes and investors

REITs are equity vehicles and hence their returns fluctuate with the overall equity market.

often adopt a buy-and-hold strategy to receive the timely dividend payouts derived from
rental income.
REITs are therefore increasingly attractive for retail investors who seek diversity and stability
in the midst of cyclical fluctuations in the economy. Most S-REITs distribute at least 90% of
their taxable annual income to shareholders and invest at least 75% of their assets in
income-producing real estate. Furthermore, dividends, derived in part from rental income
are strongly correlated with the high occupancy rates of assets, renewal of leases and better
valuations of property in land-scarce Singapore.
Categorizing and evaluating REITs
The type and quality of a REITs assets is an important factor affecting generated income.
Categorizing REITs by the type of property assets allows for the manifest distinction
between the alternating cycles of industrial, commercial and retail property assets. For
example, demand for industrial and office properties tend to be more sensitive to the
economic cycle than properties related to health care. This is because REITs are pro-cyclical
investments where there is an economic downturn, a REIT may see a decline in occupancy
rates2 and rentals for its properties.
Many of the S-REITs rely substantially on debt to finance property acquisitions. While
leverage can enhance a REITs distributable income3, it can also reduce its distributable
income during periods of economic weakness and rising interest rates. Rising interest rates
adversely affect REITs laden with high debt to equity ratios (gearing)4. However, with
expansionary monetary policy and strong repository of foreign reserves, Singapore is well
fortified against such radical changes in the economy.
REITs that are highly dependent upon short-term debt have higher refinancing risk than a
REIT with mainly long-term debt. That is why REITs are often evaluated based on their
gearing. REITs with high gearing may find difficulty in debt refinancing and may therefore be
forced to take measures to depress its price. These measures include cutting dividends5 to
conserve cash or issuing new shares discounted to its recent share price.
In October, the government introduced further belt-tightening measures in Singapore to
curb the speculative residential property market by imposing caps on loan terms to prevent
buyers from over-extending themselves, and lower loan-to-value ratios6 for certain
purchases. With probable knee-jerk reactions from the new measures, residential
developers may find a slow-down in property demand due to higher down payment
2
Provides real estate or REITs investors on an indication of anticipated cash flows. A high occupancy rate correlates with stronger growth
and higher cash flows.
3
Total amount of income distributed to unit holders typically amounts for at least 90% of taxable annual income.
4
REITs with high D/E ratios will find it costlier to refinance debts during periods of contractionary monetary policy.
5
REITs usually pay more dividends than they actually pay out for purposes of dividend smoothing.
6
Lending risk assessment ratio that financial institutions examine before approving a mortgage. Assessments with higher LTV ratios are
generally equated with higher risk, which will cost the borrower more to borrow.

required. Consequently, this may trigger a shift in interest to industrial properties. Despite a
slowdown in economic growth and the slew of property-cooling measures, the industrial
property sector may remain stable in the long run. Meanwhile, the tight industrial property
market in Singapore is compelling REITs to acquire good quality properties from other
countries besides land-scarce Singapore. This may present a resilient outlook for industrial
REITs in terms of dividend yields (Figure 2).

Figure 2: Average Dividend Yield (%) - Type of REI T

7.00
6.80
6.60
6.40
6.20
6.00
5.80
5.60
5.40
I ndust rial

Retail/ Ofce

Resident ial/ Hospital

In Singapore, the REITs sector will most certainly continue to benefit on the back of high
liquidity and low interest rates.

Writers recommendation: Lippo Malls Indonesia Retail Trust

Lippo Malls Indonesia Retail Trust (LMIRT) is an Indonesian retail REIT listed on the SGX.
LMIRT invests in a diversified portfolio of income producing retail properties in Indonesia. As
of 31st December 2011, LMIRTs portfolio consists of 10 retail malls and 7 major retail units
located within other retail malls. These retail malls and spaces are strategically located
within large urban middle-class population areas in Jakarta, Bandung and Medan. Anchor
tenants of these malls comprise of popular consumer brands and well-known retailers.
Occupancy rate remains higher than industry average at 94.1% as of 31st December 2011.
The portfolio consists of property with staggered lease expires in the next few years to
ensure a steady earnings base. (Refer to table 3 for a comparison of LMIRTs performance
with other similar REITs)
Table 4: Calculating the liquidation value of LMIRT 2011 Balance Sheet

The purpose of computing the liquidating value7 of a companys share is to determine its
floor (lowest) value. To determine the liquidation value of LMIRT8, it is essential to itemize
the relevant assets owned by the company. The forced sale value of each asset is
represented by the estimated coefficient, which represents a conservative estimate. After
which, the values of the residual assets (liquidating value) are aggregated and the liabilities
discounted in order to arrive at a long-term conservative target price of $0.550. The current
price of the stock is therefore lower than its underlying fundamental value.
(a) LMIRT had recently announced proposed acquisitions of 4 properties, 2 of which are
located in Palembang, while the other 2 are to be located in East Jakarta. The total
acquisition cost is expected to be $188.1 million. All 4 properties are to be purchased
at a discount to the book value. In view of the upcoming acquisitions, it is likely that
LMIRTs DPU will increase with a corresponding increase in the dividend yield in the
long run. In the short run, additional interest expense (from acquisitions) may result
in a drag on the DPU.

7
8

The liquidation value (LV) per share is computed as follows: LV = (LV of assets Total liabilities)/ No. of shares outstanding.
The distinction between Lippo Malls Retail Trust and Lippo Malls Group is made clear in the balance sheet 2011.

(b) In comparison to other retail REITs, LMIRT has a significantly lower debt to equity
ratio of 9.30% (No loan repayable until June 2014) and a correspondingly high
dividend yield of 7.10% as of 20th October 2012. The management is proposing to
finance the acquisitions from proceeds raised from issuance of $250 million worth of
3-year notes at 4.88% and $50 million notes at 5.875%. It is likely that LMIRT will
remain in a comfortable position due to its relatively flexible gearing.

(c) One of the acquired malls, Kramat Jati Indah Plaza (KJI), has received a rental
guarantee of approximately $1.4 million per quarter for FY2013 and FY2014. The
current committed occupancy rate of approximately 70% is expected to increase.

(d) From figure 3, LMIRTs lease terms are in a relatively safe zone, with a majority of
leases expiring in and beyond 2016. As such, it is unlikely that LMIRT will experience
difficulties negotiating extensions of lease in the near future, given that the lease
expiries are not altogether concentrated within the next four years.

Figure 3: LMIRTs portfolio lease profile

Figure 4: Lippo Malls Indonesian Retail Trust Daily Charts (Source: Chart Nexus)

A general uptrend can be spotted over the past 12 months. A blue linear trend line is drawn
to connect the respective highs. It is likely that there may be a retracement from the current
high of $0.475, since the shadow of the doji has broken through the trend line. Based on
price bar patterns, it seems that an evening star9 has formed at the top of the chart. The doji
gaps up from the bullish candle before gapping down to the bearish candle. From the
volume indicator, it seems like there is a temporary exhaustion after the high buying
volume. These are probable signs of downward retracement as well. However, an uptrend
will be maintained over the mid-term before any possible mean reversion can occur to bring
prices closer towards the long-term exponential moving average (green line).
A fair value may probably range from $0.430 to $0.440. Given LMIRTs rally over the past 10
months, it is probable that a retracement will occur and this may be a good opportunity to
adopt a buy-and-hold strategy. Retail investors should not be over-concerned about the
price of trust and should appreciate that LMIRT is currently at a discount to its underlying
book value (conservative liquidation value of $0.550). A buy-and-hold strategy works well
for LMIRT as well given the probably long-run increase in DPU due to the recent major
acquisitions. Unit holders can expect to receive timely dividend payouts if they adopt a hold
strategy.

Joel Leong

A 3-bar pattern that is indicative of a bearish reversal.

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