By Kalpana Rashiwala

(SINGAPORE) The market capitalisation of Asian real estate investment trusts (Reits) shrank by almost a third in the second half of last year compared with the first half, as unit prices of Reits dived and new listings dried up.

Singapore Reits took one of the worst beatings, with market cap declining 53 per cent between June 30 and Dec 31 last year, CB Richard Ellis' (CBRE) data shows.

The average price fall for S-Reits was 54 per cent - the worst for seven Asian Reit markets covered in CBRE's study.

In fact, with the exception of Singapore and Japan, Asian Reit markets in terms of average price still managed to outperform the broader stock market.

Lack of available credit was the single most important issue facing Asian Reits. CBRE's study covered Reit markets in Japan, Singapore, Hong Kong, South Korea, Taiwan, Thailand and Malaysia.

A recent regional Reits report by DBS Vickers Securities said that as global credit pipelines remain blocked, the issue of refinancing and debt rollover is likely to remain the top investor focus. In terms of debt maturity profile, the situation appears more acute in Singapore, where a larger proportion of S-Reit debts are maturing. An estimated $3.2 billion or 24 per cent of total sector indebtedness is due for refinancing in 2009.

DBS Vickers also noted that credit spreads have increased and higher interest expense would erode projected distribution per unit growth. The firm also observed that S-Reit yields have never been higher, and this is likely to be a function of the lag effect from positive rental reversion and drag on share price from equity issue overhang concerns and asset deflation prospects, especially in the office sector.

S-Reits are yielding 12.5 per cent based on FY09 dividend, a 900 basis point spread over the long-term bond yield, with office and selected industrial Reits on the higher end of the band. The sector is trading at an average of 0.4 times price-to-net asset value, as investors price in an asset deflation environment. 'To highlight this, implied property yields of 8.5 per cent are significantly higher than current property returns of 5.0 per cent,' the report said.

'The first one-and-a-half months of 2009 saw stock prices in the S-Reit sector falling by 10.4 per cent year to date, versus a 5.2 per cent decline in the EPRA/NAREIT Asia Index and compared to +9 per cent, +7 per cent and +3 per cent in Hong Kong, Malaysia and Thailand respectively,' DBS Vickers added.

CBRE in its report said that although the current downturn in capital markets is expected to be prolonged, mergers and acquisitions may be an alternative for S-Reit managers to strengthen their portfolios.

'Such activity could take the place of direct real estate acquisition, which is more difficult as the slump in S-Reit prices has led to the uptick of distribution yields, making it harder for them to make yield-accretive acquisitions. Going forward, S-Reits are likely to temporarily cease purchasing new assets and instead focus on their existing portfolios to sustain revenue growth,' CBRE said.

The property consulting group also pointed out that the downward cycle in Asian property markets is set to last for the rest of 2009 and it remains difficult to predict whether a recovery will begin in 2010. 'Rental incomes and the asset valuations of Reits will therefore be signficantly affected,' it added.

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