Calm may return to the Singapore REIT (S-REIT) sector in June after a predicted peak in inflation prices in the 2QFY2022, say DBS Group Research analysts Geraldine Wong, Derek Tan, Rachel Tan and Dale Lai.
“Our strategists believe that rate hike fears will likely peak as we move towards the Federal Open Market Committee (FOMC) meeting on June 15,” the analysts write.
In that time, rate hike casualties may see a rebound in prices, they add.
“The Fed has provided market guidance of a possible further two 50-basis point hikes in the upcoming June and July meetings. Our economists believe that further hikes thereafter will depend on data,” they say.
“Overall S-REIT FY2022 yield stands at an attractive 6.0%, with average share price upside potential of 6.0%, implying total returns of 12% from current level.”
The analysts’ report on June 2 comes after the Singapore REITs Index (FSTREI) dipped by 4.2% month-on-month (m-o-m), mirroring a 3.7% decline on the benchmark Straits Times Index (STI).
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During the month of May, market sentiment was dragged down by the risk of a global recession, coupled by the lockdowns in several Chinese cities.
“The lockdowns had worsened the supply chain disruptions that had partially fuelled the spike in inflation rates globally. With the Russia-Ukraine conflict yet to see any resolution, market sentiment turned cautious with a risk-off trade a key theme for the month in May,” the analysts note.
Among the real estate subsectors, office S-REITs logged the steepest declines at 6.0% m-o-m, which had been one of the better-performing real estate subsectors year-to-date (y-t-d).
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US office S-REITs and industrial S-REITs stood second and third in terms of m-o-m declines at 3.8% and 3.6% respectively.
Hospitality S-REITs declined by a narrower 2.2% m-o-m amid the market focus on the reopening of Singapore’s borders.
China lockdown release to give near-term lift
The release of Shanghai from its Covid-19-induced lockdown on June 1 is also likely to give the S-REIT sector a near-term lift.
However, the analysts believe that a full recovery of the market is likely to be a “couple of quarters away”.
There’s still value in oversold names like CEREIT and DHLT
Amid the drag in market sentiment, S-REITs that were focused on foreign properties were further dragged down by currency woes.
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In May, the strength of the Singapore dollar (SGD) against other currencies like the Japanese yen (JPY), Euro and British pound (GBP) y-t-d has led to a de-rating of selected players who have exposure to these currencies.
The steepest drop was reflected in Euro-focused stocks like Cromwell European REIT (CEREIT) and Daiwa House Logistics Trust (DHLT), which fell by a respective 11.0% and 9.5% m-o-m.
These S-REITs were amongst the heaviest decliners in May, as investors were concerned about the potential drag on distributions from their respective weak source currencies.
In a previous report, the analysts from DBS had highlighted that the currency risk for S-REITs was overplayed with currency hedges in place, limiting downside risk to distributions to -1.7%.
As a result, they see value in oversold names like CEREIT and DHLT, who are trading at yields of 9.0% and 7.0% respectively.
Hospitality S-REITs to continue to see growth in RevP
Beyond their being beneficiaries of the border reopenings, Hospitality S-REITs are likely to see an acceleration in revenue per available room (RevPARs) in the 2QFY2022 to 3QFY2022, bringing valuations higher.
The two quarters ahead are a seasonal peak for the hospitality sub-sector.
The estimated growth in RevPAR will also be driven by a “robust” return of corporate and leisure travel, the analysts note.
