The S-REIT theme in 2008 is likely to be a departure from previous years? story of acquisition growth. The climate has changed and there are many issues facing the sector. Some of these include S$ strength, inflation, higher cost of debt and equity, lack of investment-grade assets, and finally too many players in a crowed space. Against this backdrop, the past growth strategy by acquisition is probably over. Focus should thus be moderating expectations or alternatively providing new avenues for growth. We see some options available such as development projects, ?share buy-back?, taking over or merging with another REIT. In this uncertain climate our selection criteria is thus defensive. We prefer S-REITs positioned in the more resilient retail or commercial sector, with trading unit price at or below book value and REITs who are delivering high yield. Simplistically, we are targeting capital preservation with high distribution per unit. Finally if the worst case economic scenario does occur, we see a strong likelihood of M&A emerging in the form of merger between the smaller REITs and/or larger REITs taking over smaller ones. Our preferred REITs are thus Suntec, FCT, CCT and MMP. However for those with higher risk appetite, we are seeing value emerging from MLT and ART.

Uncertain market ahead in 2008. Going into 2008, the outlook for the equity market and debt market remains uncertain at best. The implication is that cost of capital in the near term is likely to remain expensive. In so far as S-REITs are concerned, this means that the strategy of growth via acquisition with cheap funds is no longer viable. In this scenario, we see the key issue to be S-REIT managers' continued bullishness and their continued guidance for strong growth trajectory. The obvious danger is that when reality strikes and expectations are not met, the market could be very unforgiving.

Two types of REITs. The market has segmented S-REITs into two camps, i.e. Beta REITs and Yield REITs. The key differentiating factor is in the high P/B ratio of the former and below 1.0x for Yield REIT. We see potential for both camps, and the choice for investors for either is a function of their risk appetite. The Beta REITs are those with high P/B ratio and as the market has already priced in growth, they have to deliver. Yield REITs on the other hand are more akin to bond instruments and have low P/B, as such we see lower downside risks.

New growth formula needed. In light of the new market dynamics, S-REIT managers desperately need a new strategy for growth. We see a few options available; one avenue is to develop its own assets (AREIT, see later section), M&A is another (see M&A section), other possible option is to redeem its own units (i.e. unit buy back, MMP is in process of getting permission from SGX to do this). There is also the possibility of removing an underperforming manager in favour of one that can deliver. Finally if all options are exhausted, REIT managers might need to moderate expectations.