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Investors warned to watch the variables with REITs

Real-estate investment trust funds, or REITs, have become a popular investment tool which guarantees higher returns, but investors are advised to factor in cyclic changes and external variables when choosing favorable investment targets, market watchers said yesterday.

Following in the steps of two other financial groups, Shin Kong Financial Holding Co (新光金控) has started raising capital for its Shin Kong No. 1 REIT, which is scheduled to hit the market next month.

Real-estate investment trusts, which own properties such as offices, hotels and hospitals, pay out almost all the income they earn in dividends, making them attractive to investors seeking regular returns with the possibility of capital gains.

Shin Kong's REIT obtained preliminary "twAA" long-term and "twA-1" short-term corporate credit ratings from Taiwan Ratings Corp (中華信評), a local arm of Standard & Poor's Ratings Services, considering "the adequate performance history of its property portfolio in terms of rent rolls and high occupancy rates," according to the report issued on Tuesday.

"Although the property sector is highly cyclical, office buildings should be the least affected during the downturn, while hotels are most likely to be impacted by external variables," the report's author Daniel Hsiao (蕭黎明), associate director at Taiwan Ratings, said in a telephone interview.

Shinkong No. 1 REIT will initially have a NT$11.3 billion (US$336 million) property portfolio consisting of four properties:the Shinkong Jasper Tienmu Building (52 percent of the portfolio), Tainan Shinkong Mitsukoshi Building (28 percent), Shinkong International Building (10.1 percent) and Taiwan Securities Building (9.9 percent).

"The overall asset quality of the trust's portfolio is very strong and all the properties have a solid tenant base," the report said.

Cathay Financial Holding Co's (國泰金控) No. 1 REIT has the Sheraton Taipei Hotel making up 75 percent of its portfolio, along with the Taipei Ximen Building and the Taipei Chunghwa Building.

Taiwan Ratings assigned it a "twA-" long-term and "twA-2" short-term credit rating last month.

"The ratings somewhat reflect the portfolio's stability. If the government allows more Chinese tourists to come to Taiwan, the upside will drive up hotels' revenues. However, if unexpected problems occur, such as SARS or avian flu, the hotel sector will be the worst hit," Hsiao said.

Wendy Hsueh (薛惠珍), research director at DTZ Debenham Tie Leung (戴德梁行), said that as long as property portfolios are diversified, office buildings and other consumption-related properties such as shopping malls could be good investment targets.
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