Investors are being warned not to be tempted to buy S-REITs coming from either Singapore real estate investment trusts or government bonds.
In a report last week, Sai Min Chow and Tony Darwell said they have noticed the greatest mis-pricing in the industrial and retail sectors. However, the negative views have been observed in the office sector.
Compared to the historical spread of 324 basis points for over five years, the existing yield stretch between the 10-year bond of the Singapore government and S-REITs stand at 543 basis points.
According to the statement made by the Analysts, "The low yield spreads of 2005-2008 reflected leveraged acquisitions amid positive rental reversions delivering 16 per cent sector DPU (distribution per unit) growth per annum. We think a supply and demand imbalance in the office, retail and industrial sectors, amid weak economic activity, will underpin a widespread contraction in DPUs as REIT portfolios are faced with rising vacancy and negative reversions (on lease expiry).”
The central business district experienced a low negative 558,418 sq ft early this year. “With the demand outlook weakening, vacancy is likely to rise faster and remain higher for longer than expected, suggesting a drawn-out recovery,” added by the analysts.
Declining retail sales will give Singapore retail proprietors with problems and some tenants may be allowed to bid down rents with the new supple of retail space.
“As supply increases and retailing activity remains broadly weak, retailers will begin to rationalize the number of outlets and become increasingly selective of mall locations and sensitive to asking rents,” Nomura analysts explained.