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Suntec REIT: Broke resistance.

Wednesday, January 26, 2011

I was just having a chat with Nick in LP's cbox not so long ago regarding REITs and their fair values. Nick mentioned that REITs with high gearing have little growth prospects and therefore will not see their unit price go up (i.e. yield will not compress). I think he mentioned that the stock market is rather efficient when it comes to REITs.

In theory, I agree with Nick. However, I mentioned that it is hard to be sure since how much a REIT should trade at is very often a matter of sentiments, this is the same with stocks. Certain REITs are small and are not covered by analysts. They could also be too small to interest institutional investors. Their unit prices could continue to languish even if they provide decent yields with relatively safe gearing. Certain REITs are obviously overvalued and give very low yields with relatively high gearing but they continue to enjoy much attention. For example, I would not bother buying into CMT. The yield is so unattractive.

Nick used Suntec REIT as an example of a REIT with high gearing and therefore it did not see its yield compress much. However, the last session saw Suntec REIT's unit price close at a high of $1.61, forming a wickless white candle, on the back of heavy volume. Yield is compressing and quite significantly too. The last time this REIT was at $1.61 was in Jun 2008!

Could we see this REIT's unit price move higher? A wickless white candle coupled with heavy volume is bullish. So, expectation is for price to move higher. However, the MFI is nearing overbought territory. In case of a pull back, it would be interesting to see if $1.58 could be resistance turned support.

Mr. Market is always right and he enjoys his hat tricks.


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