Despite a 2% month-on-month collective increase within the Singapore REIT (S-REIT) sector, 15 of the 44 S-REITs are still trading within 5% of their 52-week lows.
However, DBS Group Research analysts Derek Tan, Dale Lai, Rachel Tan and Geraldine Wong say they see the sector bottoming out once the US Federal Reserve hikes lift off.
“Even if we assume 10-year yields will rise to 2.0% in the longer term, we are still looking at an attractive yield spread of 3.8% (in line with historical mean),” they write.
In their March 4 report, the analysts say they remain buyers with a preference for S-REITs that are beneficiaries of the re-opening theme, as well as selected high-growth industrial names, taking advantage of the current share price weakness.
As such, they have named Frasers Centrepoint Trust (FCT), CapitaLand Integrated Commercial Trust (CICT), Suntec REIT, CapitaLand China Trust (CLCT) and Ascott Residence Trust (ART) as their re-opening plays. They have also identified Frasers Logistics & Commercial Trust (FLCT) and Mapletree Industrial Trust (MINT) as their industrial picks.
As the US Federal Reserve seeks to raise its rates when it meets on March 15 to 16, the analysts deem the S-REITs as being “well-buffered” against the hikes.
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As at the date of the report, S-REITs have an interest coverage ratio (ICR) of 4.9x, ranging from 3.2x to 21.0x, comfortably above the minimum 2.5x imposed by the Monetary Authority of Singapore (MAS).
“This implies that S-REITs have the flexibility to gear up towards the 50% level if they choose to, although we sense that most managers are keen to keep gearing closer to the 38%-39% level, providing headroom for opportunistic acquisitions,” says the team of analysts.
“We have stressed tested our estimates and a 1.0% hike in interest rates will see ICR ratios dip to 4.3x (ranging between 2.5x to 18.0x), implying that S-REITs are well buffered against interest rates hikes,” they add.
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Asset valuations for S-REITs may also see upside, as capital rate spreads are not excessively tight, ahead of expectations say the analysts.
“We note that capital rates for various real estate classes have compressed by up to 100 basis points over the past decade. The tightest compression was seen in the industrial (logistics, business parks) and suburban retail sectors given their proven resilience throughout the Covid-19 crisis supported by increasing capital allocations from investors into these emerging asset classes,” they write.
Despite the low capital rates, the analysts note that capital rate spreads are still within historical range and not excessively compressed.
“As such, with rental growth picking up in 2022-2023, asset valuations should remain sticky or trend higher as portfolio net operating income (NOI) improves,” they add.
To this end, the analysts see the S-REIT sector’s “relatively stable” share price as “positive”.
“This highlights that investors will return to the sector at the right price,” write the analysts. “While we have seen outflows owing to tactical repositioning within and out of S-REITs in recent times, the uncertainty in the market has resulted in investors taking a reverse strategy.”
Photo: Albert Chua/The Edge Singapore
