Promising plays on Asian real estate

By Senior Writer Jody Clarke Oct 30, 2009

Jody Clarke

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In common with commercial property stocks in Britain, Asian real estate investment trusts (Reits) have performed strongly in recent months. Since March, the Singaporean Reits (S-Reit) sector, for example, has near- doubled. So are S-Reits still a buy?

Yes, says Ven Ram in Barron's. Singapore is in a much better state than Western economies. Unemployment may be at a four-year high, but at 3.3% it's well below levels in America and Britain. The number of job vacancies has also started to rise. And given that Singapore pulled out of recession in the second quarter of this year, the picture should steadily improve.

Based on their yields alone, S-Reits – which must distribute 90% of their taxable income to unit-holders – still look good value. Even if you assume that prime office rents will fall by a further 20% to $6 per square foot, says Jonathan Ng of DMG & Partners Securities, the sector still trades on a 2010 yield of 6.8%. Meanwhile, most Reits have used share issues to pay down debt, so that leverage in the sector is below 30%, a "comfortable level," reckons Ng.

Ascendas Reit (SP: AREIT), which boasts an occupancy rate of 96.8%, is the bluest of blue chips in the sector. However, having risen by 35% since we tipped it in April, the yield has come down from 13.5% to 3.4% today. So now we think that Cambridge Industrial Trust (SP: CREIT), which invests in everything from warehouses to logistics centres, looks much better value. It has a defensive business structure, according to DMG, and yields more than 11%. Ng has a target price of S$0.64 a share. Mapletree Logistics (SP: MAP), another industrial-focused Reit, yields 7.8%.

But as far as value goes, investors need look no further than Japan. The Tokyo Stock Exchange Reit Index trades on a price/book-value ratio of just 0.7, and the market is out of favour right now because vacancy rates in Tokyo have risen from 2% in 2007 to 9% today. Sure, that sounds like a reason to avoid J-Reits, but "that's quite close to peak of last two cycles", says Frankie Lee, property specialist at Henderson Global Investors Asia. "So if you look at demand over the last 20 years, it would be quite unusual to see demand for office space contract in 2010 because we've already seen two years of decline." He sees 20% upside in the share prices of Japanese property companies over the next two years.

His favourites in the sector are United Urban (8960: JP) among mid caps and Japan Real Estate (8952: JP), the second-largest Reit in the country, from the large caps. "Its asset quality is very good and the management has a strong track record of improving dividend yields at a greater rate than the underlying rental rate. Its financial management is sound and it is quite well positioned for acquisitions." The stock yields 5.3%, and is down 10% year-to-date.

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