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Singapore investors are picking REITs over developers

Singapore investors are picking REITs over developers

A growing number of analysts in Singapore have sent a message, stating that Real Estate Investment Trusts (REIT) are a better bet than developers in light of the island’s recent cooling measures

This is a signifier of the change in trends that came after the government shocked the real estate industry by imposing a fresh set of curbs that came into effect at midnight the following day—that put a damper on the rising home prices and climbing sales that were prevalent for much of 2017 and the first half of 2018.

Now, the trade has reversed. The FTSE Straits Times REIT Index is outperforming a benchmark that tracks developers. Property stocks, which had their best annual gain in five years in 2017, have declined 5.4% since July 5, while REITs are up 0.7% over the same period.

Vijay Natarajan, an analyst at RHB Research Institute Singapore Pte, stated in a phone interview: “There’s been a lack of interest in developer stocks post the cooling measures and some of that capital has moved out to other sectors.”

“The market had not expected the severity of the measures announced.” He added.

Singapore took renewed steps to cool down home prices after they rose more than 7% in the first six months.

Under the new rules, individuals who take out their first housing loan face stricter borrowing limits, which means that they have to stump up more cash upfront. For foreign purchasers of residential property, the additional buyer’s stamp duty was increased to 20% from 15% previously.

That’s going to impact home sales and prices. Developers may lower asking prices by as much as 10% following the cooling measures, according to Jefferies Singapore analyst Krishna Guha, who said he prefers REITs post the curbs.

DBS Group Holdings analysts Mervin Song and Derek Tan stated that macroeconomic uncertainties have also kept the sentiment subdued for developer stocks, and investors now see REITs as a safe haven. Among the property trusts, the office sector looks the most attractive. CapitaLand Commercial Trust – Singapore’s largest office landlord – and Ascendas Real Estate Investment Trust are among their top picks.

Low vacancy levels have encouraged office landlords to seek higher rents, with the cost for grade A space rising 4.1% to $10.10 per square foot a month in the quarter ended June, the fastest pace since the March quarter of 2014, according to CBRE Group Inc. data.

Bloomberg intelligence analysts Patrick Wong and Kristy Hung also stated that higher rents and low vacancy rates should work to cushion the impact from interest-rate increases.

“Developer stocks are subject to high policy risk,” Mr Wong stated. “Real estate investment demand will further concentrate on the commercial market and support the growth in capital value of commercial properties owned by major landlords.”

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