After a difficult year, investors in real estate investment trusts (REITs) seemed to have swallowed a dose of reality on what they can and cannot deliver.
It was a lesson learned the hard way. Once known for offering high capital earnings, the REITs sector has now lost its shine, as unit prices dropped as much as 50 percent from September last year to March this year. REITs were hit by various market concerns over earnings, as occupancy rates and property rents fell, and debt levels like credit line froze.
Saizen REIT, for instance, deferred its distribution payouts since the second quarter due to credit problems. Recently, the public dispute between Cambridge Industrial REIT and MacarthurCook Industrial REIT highlighted the financial issues that the sector has had to deal with.
The ability of REITs to deliver decent yields stood out amid the crisis, something that many investors neglected when pursuing capital earnings before the global recession. Looking at the annualised distributions per unit (DPU) in Q3 of 2009 and closing unit price on Thursday, all 13 REITs seemed to have distribution yields of about 5 percent.
This changed how several investors view the REIT. “People are becoming more receptive to REITs as yield instruments rather than as growth instruments,” said CIMB REIT analyst Janice Ding.
The global financial crisis tested the ability of the REITs and revealed the risk factors, which many investors had previously overlooked, market watchers said. “We believe this is for the better, as investors now have a more balanced perspective on the strengths and weaknesses of this investment vehicle,” said Analyst Meenal Kumar of OCBC Investment Research.
The overall distribution yields could be higher if not affected by weaker DPUs. Nine of the 13 REITs saw their DPU fall from a year earlier.
Five of nine REITs with lower DPUs were affected by reduced earnings. An example of these was the hospital sector such as CDL Hospitality Trust and Ascott Residence Trust, both of which had less distributable income as the crisis hit the tourism industry.
Equity raisings were common among REITs, as they tried to pay off maturing debts despite the credit crisis. So far, their efforts have been successful in lessening the pressure on its balance sheet. According to MAS’s Financial Stability Review, as of end-October this year, the local REIT sector had 18.5 percent total borrowings maturing in 2009 and 2010, down from 57 percent in the previous year.
For now, REITs investors remain cautious. As what MAS said in its report, several other risks remain possible – credit condition may worsen again due to sudden decline in financial markets and the rental yields for industrial and commercial space may also fall further.