Investors should accumulate Singapore REITs (S-REITs) as a play for recovery and a hedge against inflation, according to DBS Group Research analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong in a June 8 report.
On this, the analysts have kept their “buy” calls on all nine S-REITs under their coverage, including Mapletree Logistics Trust (MLT), Keppel REIT, Frasers Logistics & Commercial Trust (FLCT) and CDL Hospitality Trusts.
The analysts, who deem the S-REIT sector as an “attractive inflation hedge”, explain in their report that the combination of “ample liquidity, supply shortages and rising demand” from economic recovery is likely to push inflation rates higher going forward.
They believe that real estate like S-REITs will be beneficiary, citing historical analyses that show a positive correlation between higher inflation and higher share prices.
More specifically, the office S-REITs and Hospitality S-REITs are the two subsectors demonstrating higher correlation given their propensity to raise rents or rates higher compared to other sectors.
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Furthermore, they believe that the market is already positioned for “an expected taper from the US Federal Reserve come 3Q or 4Q of FY2021 if inflation rate continues to rise”. As such, the analysts see a gradual rise in rates in 2H2021-2022 supported by positive economic growth.
They also do not envision a repeat of the weakness that they saw in 1QFY2021 and higher interest rates should not be a major hurdle for most S-REITs.
This is due to increasing confidence in a robust earnings growth of about 18% in FY2021, still attractive spread compared to 10-year yields, and ability to deliver acquisitions.
As Singapore heads into the last week of the current phase 2 (heightened alert) measures, the analysts anticipate that investors have treated this episode as a one-off incident, and that any impact on earnings would be limited.
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Therefore, the focus for them in 2HFY2021 is on the pace of earnings recovery, and they believe that there is room for S-REIT prices to “play catch-up” to the actual earnings growth trajectory.
They highlight that they see value in the office sector -- specifically Keppel REIT and Prime US REIT -- whose share prices are lagging their earnings recovery. “We prefer the “growth-focused” names as we see an earnings-led re-rating.” the analysts say.
DBS’ picks are Frasers Centrepoint Trust (FCT) for retail and KREIT and Mapletree Commercial Trust for commercial.
Within the logistics subsector, the analysts’ picks are Mapletree Logistics Trust (MLT), Frasers Logistics & Commercial Trust (FLCT), AIMS APAC REIT (AIMS), and ARA LOGOS Logistics Trust (ALLT), while highlighting CDL Hospitality Trust (CDREIT), and Far East Hospitality Trust (FEHT) for hospitality.
