SINGAPORE: The Singapore real estate investment trust (REIT) market is up about 40 per cent this year -- double the returns in major REIT markets like the US and Japan.
While returns and yield spreads on Singapore REITs may be the best in the world, some analysts said the market could become over-invested
In 2002, CapitaMall Trust became the first Singapore-listed REIT. A decade on, there are over 20 REITs across the commercial, industrial, hotel and healthcare property sectors.
Low interest rates on bank deposits have helped to keep investor interest high in REITs and other stapled securities.
Industrial REITs for example pay dividends of up to eight per cent -- more than the five to six per cent offered by blue chip stocks.
Gabriel Yap, executive chairman of GCP Global, said: "The REITs are trading at about 20 times the PE (price to earnings ratio) as compared to the real estate developers at only 12 times. Because it's a REIT structure that pays stable dividends, the valuations are much higher."
Some analysts said REITs may be an over-invested asset class.
Excluding other stapled securities and business trusts, such as Hutchison Port Holdings Trust, the REIT market in Singapore has a market capitalisation of around US$38 billion. That is up more than three times from its post-Lehman crisis bottom in 2008.
Terence Wong, executive director at DMG & Partners Research, said: "There is a risk of the sector being over-owned, since everybody wants a piece of the pie right now. We've seen that in 2006 and 2007, where REITs were seen very much as a growth stock. And I think that's the danger.
"Right now, we're seeing the same thing, with the REITs rising about 40 per cent so far this year. When complacency sets in, if the party ends, I think a lot of people will get hurt."
From 2004 to 2007, many REITs enjoyed high valuations due to the stock market boom. REIT managers borrowed money to acquire new properties, increasing their gearing.
But the financial crisis struck in 2008, and many REIT managers with over-geared balance sheets were forced to raise cash by issuing more equity, thereby diluting the value of the stock.
In a little more than six months, from May to December 2008, the market capitalisation of REITs had fallen 2.6 times.
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