The team at OCBC Investment Research (OIR) has recommended investors accumulate the following “high-quality” Singapore REITs (S-REITs) should they be looking at longer-term investments: Ascendas REIT (A-REIT), Frasers Logistics & Commercial Trust (FLCT), Keppel DC REIT (KDC REIT), Mapletree Industrial Trust (MINT) and Mapletree Logistics Trust (MLT).
These, according to the team, are their preferred picks within their “resilient basket” as they are expected to benefit from secular growth trends with room for “solid inorganic growth opportunities,” it writes in a March 10 report.
That said, the team says it would expect its picks in its “recovery basket” to outperform its resilient picks within nine to 12 months.
On that, it has identified retail and hospitality REITs for its recovery basket as Ascott Residence Trust (ART), CapitaLand Retail China Trust (CRCT), Frasers Centrepoint Trust (FCT), Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT).
According to the team, these are great for investors looking for exposure in the sector, “given that we have already seen a more meaningful rotation to value and cyclical stocks globally”.
Looking at the earnings season for the 4QFY2020/2HFY2020, the team notes that that 11 out of 15 S-REITs reported distributions per unit (DPU) that either met or exceeded its expectations, implying that a gradual recovery is on track.
While the S-REITs sector has come under selling pressure in recent weeks due to the sudden and sharp spike in the 10-year US Treasury yield and 10-year Singapore government bond yield, there is a “low corelation between S-REITs’ share price performance and [the] Singapore government 10-year bond yield, but sudden spikes can bring about volatility,” says the team.
“This leaves us more cautious on the sector in the near-term as sentiment over yield sensitive instruments weakens and we expect further volatility in the months ahead,” it adds. “From a valuation perspective, a spike in sovereign bond yields can also compress the distribution yield spread between the S-REITs sector against the 10-year Singapore government bond yield, thus making valuations look less attractive.”
“Based on historical data points, the correlation between the proportionate performance of the FTSE Straits Times REIT Index (FSTREI) and change in 10-year Singapore government bond yield was low at only 0.08 from the period between the start of 2004 to March 5,” it notes.
To this end, though the sudden surge in bond yields is a concern, the team says investors should focus on the underlying drivers such as a stronger economic outlook, which would support the operational performance of S-REITs.
