Bulk of equity issuance completed: YTD S-REITs have raised S$2.5bn in new equity (19% of end 2008 market cap). While we believe that the bulk of the sector funding has now been resolved, we maintain our cautious stance. YTD S-REITs are up 13%, underperforming both the STI (+27%) and developers (36%). We expect underperformance to continue as we are unable to identify significant catalysts that will re-rate the sector.

Appetite for acquisitions still limited: Improvements in the debt and equity markets bode well for the outlook for REITs given the capital intensive nature of the business model. Despite this we struggle to see how REITs will be able to achieve significant growth momentum over the next 12 months. We believe REIT managers will continue to maintain a conservative stance with regards to gearing and, without an appetite for further acquisitions, earnings upside will be limited to organic growth.

Organic growth outlook still muted: Given the downturn in the property market, no sub-segment has been spared and both rentals and occupancies are under pressure. In particular, we expect operating metrics for the office and industrial sub-segments to weaken. Looking across the S-REITs, we expect an average of 4% negative DPU growth in 2009 and 2010 respectively. This is driven by lower rentals, higher debt costs together with dilution from recent equity issuance.

CMT remains our preferred pick: Our preferred exposure to the sector remains CapitaMall Trust given its weighting to the retail sector which we believe will fare relatively better than other property sub segments. We remain negative on the industrial exposed A-REIT and expect its operating metrics to face further downward pressure. Given our expectation that the office market will not show signs of recovery until at least 2012, we would also avoid office-exposed CapitaCommercial Trust and Suntec.