Anyone who has anything to do with the financial markets, from hedge fund managers to novice retail investors, will want to forget the Great Crash of 2008.  For crash,  the first six months of the year saw sharp falls across all markets. The third quarter saw financial disaster and the fourth quarter saw financial catastrophe. As of this time of writing, daily index moves of more than 5 percent are not uncommon, though for many years such daily moves were noteworthy events, worthy of discussion in the weeks that followed.

Singapore’s listed property shares and Real Estate Investment Trusts (S-REITS) have not been spared the carnage. The typical S-REIT lost around half its value in 2008. One result of this collapse is that on paper  some S-REIT dividend yields are well into double digits, with some above 30 percent. A superb investment if they payout, but will they do so?  One trader at regional hedge fund is dubious. 

“Well, in theory those are the yields they will pay out,” he says. “But their whole business model is a dinosaur. Several of Singapore’s REITs have substantial debt they have to pay off, and it’s going to be difficult for them to refinance this given difficult conditions in the credit markets. For years, Singapore’s REITs have taken easy credit for granted, but now everything has changed.”

Another problem with S-REITs could come from the tenants.  Amid a weakening economy, and with the lifeblood of credit hard to come by, firms of all sorts are trying to  hoard cash – indeed, the managers of S-REITs will doubtless want to hoard a bit of cash themselves.   Many tenants are likely to see reduced cash flow, and could (at the very least) start delaying rent payments.  Some tenants could also scale back operations or (at worst) go out of business themselves. 

According to a recent research report by Citi’s Wendy Koh, perhaps the one bright spot in Singapore’s REIT scene is healthcare REIT Parkway Life, which she recently upgraded to Buy, citing good revenues from its Japan properties and Singapore hospitals, as well as a successful refinancing of its debt in October. Koh sets the target price at S$1.29, about a 70 percent increase from current depressed levels.

Otherwise, it’s all doom and gloom among the big brokers. As for Singapore’s property shares, analysts are less than optimistic on the outlook. 

“UBS economists now expect Asia to grow at 6.1 percent (from 6.9 percent) and Singapore to grow at 1.5 percent (from 4.8 percent) in 2009,” writes UBS analyst Regina Lim.  “We now expect prime residential launch prices to fall 20 percent from current levels (32 percent peak to trough) and prices to recover in 2010.”

The specter of defaults
She notes that in 2007 developers sold 14,700 units, 40 percent of these in prime districts.   Estimating that 50 percent of these units could have been bought on deferred payment schemes - where buyers pay 20 percent of the purchase price at the launch and the balance upon completion - she feels that if prices fall more than 20 percent then some buyers may default.

 “We remain cautious on Singapore residential developers and maintain neutral ratings for City Development, Keppel Land and Allgreen, and a buy on Capitaland,” she says.

Merrill Lynch is also skeptical.  “We still think that 2009 will be the crunch year for the residential segment,” writes Merrill in a recent report.  “8,233 unites will be completed in 2009, while there are 43,718 new units waiting to be launched and/or sold.  What is not clear at this point in time is demand.  Visibility is very poor with Singapore in a technical recession, growing evidence of job cuts and waning consumer confidence.”

Merrill goes on to say that it is “too early to bottom fish”  citing the deteriorating economic climate.  “Until some visibility is restored, we would stick to our negative stance on the sector.”

And so investors face a year of uncertainty as the new year dawns. That said, it is hard to imagine a year as dismal as 2009, which saw the humiliating collapse of once iconic financial institutions and trillions of dollars of investor savings wiped out.  Inevitably some brave investors will pile into the market and one day brag about his foresight, but is the best time to do so today, tomorrow, or yesterday? For the world’s financial markets, and Singapore property shares and S-REITs, it seems to be all tunnel, no light.