Reit dividend growth outlook dismal: HSBC
Lee Meixian
The Business Times
Thursday, Jul 16, 2015
THE growth of Reit dividends is expected to slow down in the coming few years due to the unfavourable supply-and-demand outlook across various property sub-segments: office, retail, hospitality and industrial, HSBC said at a seminar on Tuesday.
The seminar was organised by the Real Estate Developers' Association of Singapore. There, Pratik Burman Ray, HSBC's director and senior property analyst, ASEAN, said that the two-year distributions per unit (DPU) are expected to grow just 2 per cent from 2015-2017 (lower still at one per cent for major Reits), compared to an average of 4.5 per cent from 2007 to 2014.
Its projections on DPU growth are based only on organic factors without factoring in growth by acquisitions.
"The growth outlook across all Reit sub-sectors is very lacklustre," he said. He cannot think of any catalyst unless there is a major demand source which pushes up demand for property space in Singapore and takes out a lot of the supply. "If you zoom into the different sub-sectors, you can see that the lowest growth is for the office sector," he added.
In 2014, share prices of office Reits soared 18 per cent, outperforming its peers, when office rents rose on limited supply. That outperformance has quickly reversed in 2015. Year-to-date, office Reits have fallen about 9 per cent in price, he said.
On the sidelines of the event, Mr Pratik Ray said that consolidation among Reits was possible but he was not sure how likely it would be, given inherent difficulties.
"The advantage of looking at deals available in the market versus buying an existing portfolio of assets that a Reit already has is that you can cherry pick and there are no other issues that the manager needs to worry about.
"If you buy a portfolio of assets in the form of a Reit, there are certain assets which you may not like, and the divestment of these assets which you don't like is a challenge," he said.
While there has not been recent cases of Reit consolidation in Singapore, he believes that Reit managers have frequently evaluated that as an alternative to growing their portfolio.
Price-wise, the FTSE ST Reit Index has been "flattish" year-to-date. It had grown 35 per cent in 2012. From mid-2013, it corrected significantly on tapering fears over the US Fed quantitative-easing policy before bouncing back in 2014.
Interestingly, the analyst also noted an inverse correlation between investors' required yield and the market capitalisation of Reits: "Anything over S$2 billion in market cap has come under more or less similar levels of dividend yield. The sweet spot for the Reit sector in terms of size seems to be the S$2-2.5 billion mark where they can start commanding lower dividend yields."
Asked if we might see other forms of assets being 'Reited' in Singapore, he said: "It's tough to say what will gain acceptance. It's a function of investors' willingness to accept new types of assets. In the US, for example, other asset types like self-storage facilities are pretty dominant, but whether that sort of asset type would be accepted in Singapore is yet to be seen.
"It's about yields at the end of the day. If the yields are compelling, investors will look at it. If the yields for a certain type of property are lower (eg. residential rents in Singapore), getting a dividend yield out of them to match investors' requirement would be more difficult."
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