Pressure seen on property trusts after buoyant year

Signs of a softening economy this year, but blue chips should be able to maintain payouts

Last year proved a bonus for some lucky investors, with special cash distributions being paid out by firms like Cordlife Group (left), firms that already pay a high dividend yield.
Last year proved a bonus for some lucky investors, with special cash distributions being paid out by firms like Cordlife Group (left), firms that already pay a high dividend yield. PHOTO: CORDLIFE SINGAPORE

The share market was anaemic and there were concerns that higher interest rates would make dividend yields less attractive, yet some gems managed to emerge last year.

Market watchers also note that while the signs are there for a softening economy this year, blue chips should be able to maintain payout levels through 2016 but it may be a different story for real estate investment trusts (Reits).

Higher interest rates combined with an oversupply of office space will put pressure on property trusts after what was a buoyant 2015.

Reits distributed about $4 billion in dividends over the past 12 months. The highest payers included Cache Logistics Trust, Lippo Malls Indonesia Retail Trust, OUE Hospitality Trust, CDL Hospitality Trusts and Frasers Commercial Trust.

Cache Logistics, which had a dividend yield of 8 per cent as of Dec 28, issued a special cash distribution of 0.86 cent per unit to existing unitholders for the period from Oct 1 to Nov 12 last year. It also did a private placement in November to raise funds for potential acquisitions in Australia, repay loans and for general corporate and working capital purposes. But the Singapore Exchange (SGX) S-Reit 20 Index turned in a dismal performance last year. The index, which measures the performance of the 20 largest and most tradable trusts of the Reit sector listed on SGX, recorded an average total return of -5.5 per cent for the year to Dec 28.

Over a three-year period, the index achieved a 5.8 per cent average total return. The average dividend yield for the 20 trusts was 7.1 per cent over this period. The 20 Reits have a combined market capitalisation of $48.7 billion.

With the Federal Reserve finally starting to raise United States interest rates, this will likely limit the share-price performance of Singapore Reits.

"We believe there may still be increased volatility ahead, even after the overhang of the Fed funds rate hike is lifted, as the attention of the market would then turn towards how aggressively the Fed would subsequently raise its benchmark rates," according to DBS Equity Research.

OCBC Investment Research pointed to growing expectations of slowing distribution-per-unit growth ahead, due to slowing or declining rentals, rising operating costs and "less favourable demand and supply dynamics within the various industries".

"The (uncertain) macroeconomic environment has constrained consumer demand and also curtailed the expansion plans of retailers and corporates. Growing caution over the global economy has delayed decision-making over the renewal of leases and take-up of new space," OCBC analyst Andy Wong said.

Mr Wong noted that these factors as well as the expected increase in supply will continue to make this a tenants' market, meaning landlords will have to be more flexible in their rental negotiations.

OCBC Investment Research prefers defensive plays and retail Reits with significant suburban exposure.

The year ahead poses challenges for other sectors as well.

While offshore marine group Nam Cheong had one of the highest dividend yields at 10.8 per cent last year, UOB Kay Hian maintains a sell call on the firm.

"We see challenges ahead for its built-to-stock model, given weak demand and continued delivery deferrals in the light of the collapse in oil prices. With third-quarter 2015 results marginally profitable, and eight and 18 vessels in its 2015 and 2016 programme respectively unsold, it faces potential losses going into 2016 as the downturn prolongs," it said.

Last year proved a bonus for some lucky investors, with special cash distributions being paid out by k1 Ventures, Keppel Telecom & Transport, Wee Hur Holdings, Cordlife Group and Chip Eng Seng Corp, all firms that already pay a high dividend yield.

Investment holding firm k1 Ventures, which boasted the highest dividend yield at 16 per cent last year, distributed 1.5 cents in cash for each share last month - a total payout of around $32.48 million.

Ms Carmen Lee, head of OCBC Investment Research, said the average dividend yield for Straits Times Index component stocks has stayed consistently above 3 per cent.

"With the recent decline in share prices, this has now moved up to above 4 per cent. So far, we do not see risks of a cut in dividend payout despite softer corporate earnings growth," she said. "With earnings growth of 5.1 per cent projected for this year, we believe that the dividend payout last year is likely to sustain into 2016."

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A version of this article appeared in the print edition of The Straits Times on January 02, 2016, with the headline Pressure seen on property trusts after buoyant year. Subscribe