SINGAPORE (Feb 20): Over the past week, the spike in 10-year bonds and fears over inflation has caused the Singapore REIT (S-REIT) index to decline by about 7%.
In a Tuesday report, DBS analyst Derek Tan believes that the recent sell-off is largely done.
Despite the sharp correction reminding investors about close to 22% decline in S-REIT prices back in 2003, Tan believes that this time, it’s different.
This comes on the back of stronger property fundamentals for most subsectors (office, hotels, industrials) supporting higher rentals/RevPAR, driving higher distribution growth rate.
“The increased income visibility and upside to earnings will, in our view, translate into tighter yield spreads going forward,” says Tan.
Amongst the S-REITs, DBS prefers the office and hospitality sectors as the outlook for office rents and hotel room rates remain bright following the recent results season.
“We believe the office sector will provide the best leverage to the cyclical upturn in the Singapore economy, while the hospitality sector will offer the fastest-growing DPU,” says Tan
Hence, DBS is maintaining its “overweight” rating on the office and hospitality REITs with its top office picks being CapitaLand Commercial Trust (CCT), Suntec REIT and Frasers Commercial Trust (FCOT), with target prices of $2.10, $2.30 and $1.71 respectively.
For hotel REITs, the research house’s top picks are CDL Hospitality Trusts (CDREIT) and Frasers Hospitality Trust (FHT) with target prices of $2.00 and 89 cents respectively.
The analyst also advocates investors being overweight on Ascendas REIT (AREIT) and Mapletree Logistics Trust (MLT), as they are consistent performers that are also leveraged to the cyclical upturn.
Furthermore, the research house also likes Frasers Centrepoint Trust (FCT) for its strong DPU growth.
The analyst also advocates investors to relook the retail sector in 2H18 as a stronger Singapore economy may translate into stronger retail sales and boost sentiment in the sector.
“We believe once investors refocus on the improving property fundamentals, a re-rating will occur. Thus, the current weakness is a buying opportunity,” says Tan.
Currently, there has been no major changes in the positive outlook for the various property sub-segments in Singapore, due to a more buoyant economic environment and easing supply pressures.
This resulted in the return and acceleration of DPU growth for S-REITs.
Hence, the analyst believes that the prospects for tightening of yield spreads towards a normalised 3% by year-end remains intact.
“In addition, our DBS economists remain of the view that the US Federal Reserve should remain measured with its rate hikes and have maintained their assumption of three rate hikes which is in line with consensus expectations,” says Tan.
Since the house view is that the increase in interest rates will be measured and inflation will remain under control, Tan believes that the current share price weakness is an opportunity for investors to accumulate as the return of growth and investors refocusing on property fundamentals rather than macro should result in a compression of yields by year-end.
Moreover, following the recent correction, S-REITs’ valuations have become more attractive considering it is potentially the start of a multi-year recovery in various sub-property markets.
As at 3.15pm, units in CCT are trading at $1.76; Suntec REIT at $1.94; FCOT at $1.43; CDREIT at $1.70; FHT at 80 cents; AREIT at $2.63; MLT at $1.23; and FCT at $2.16.
