Sector debt refinancing and recapitalising issues are likelyto be the major drivers of the S-reit sector in 2009. Ascredit markets remain tight, access to credit takes priorityover cost of funding. We see recapitalising prospectsgathering momentum when asset writedowns begin. Wesee this as necessary to the sector but size and timing isuncertain under current market conditions. Valuation-wise, these developments appear to have been largelyanticipated in the share price, however, the uncertaintycould hamper share price outperformance in the nearterm. In terms of strategy, we prefer well-sponsored reitswith good access to capital as well as those in the moreresilient sectors such as retail, industrial and healthcare.Maintain buy on Parkway Life Reit and Areit and upgradeFCT on the back of attractive valuations.

Refinancing speed bumps linger: An estimated onethird of the Sreit total indebtedness or $4.9b is due to berolled over in 2009. The tight credit market environmentwould mean that access to funding would be crucialwhile increasing competition for funds would lead to anincrease in cost of debt. Overall interest cost in the Sreitsector would rise above 4% from the present 3.2%. Forevery 50bps hike in average interest cost, DPU would beeroded by 10-15%.

Resetting the bar: We expect asset writedowns tobegin as early as this year-end. Recapitalising issues arelikely to gather momentum in the coming year, however,timing is uncertain as Sreits weigh the need to strengthenbalance sheet against the commercial perspective ofshareholder value dilution and investor appetite. Postfunding, average DPU yield is estimated at 9% andP/adjusted book NAV of 0.75x, indicating that thispossibility is reflected in the share price. Amongst Sreits,those with gearing closer to the 50% LTV mark andriskier sub-sectors such as office would have greaterrecapitalisation possibilities. This includes FCOT with acurrent loan to asset ratio of c49%. In the longer run, thehigher geared reits such as CMT, Areit, CCT may look tostrengthen balance sheet when equity markets recover.

Be selective: Given the headwinds from refinancing andrecapitalisaton rises as asset writedowns, particular in theoffice segment, filter through, our strategy would beselective. In terms of large cap stock picks, we preferAreit for its long lease tenure. In the mid cap sphere, wefavour Parkway Life Reit and FCT with their resilientbusiness model and attractive valuations. Strong balancesheet and low gearing also reduces the need forrecapitalising.