SINGAPORE (Aug 24): There has been good interest in SREITs over the last couple of months with the sector bouncing 4.6% from the lows in June, says DBS Group Research.
The rebound was due to property funds switching from developers due to the additional property cooling measures in Singapore and generalist funds seeking yield given the uncertain macro backdrop arising from the trade war between China and the US.
This is despite interest rate fears and the US Federal Reserve lifting the Fed Funds rate by another 25 basis points in June with yield spreads compressing to 3.2% from 3.7%.
“With the expected improvement in fundamentals given easing supply pressures and investors refocusing on yield instruments, we believe SREITs are poised to sustain their rally to bring yield spreads towards the 3% level,” says DBS analyst Mervin Song in a Friday report.
Song says the green shoots investors saw in the prior quarter was sustained with grade A office rents rising 4% q-o-q to $10.10 per square foot per month (psf/mth) with office REITS fast approaching a period of positive rental revisions.
In Singapore’s hospitality sector, the uptrend in revenue per available (RevPAR) was also intact, jumping 4% y-o-y.
However, hospitality REITs with a bigger exposure to upscale hotels disappointed due to softer corporate bookings during the Trump-Kim summit and difficulty in maximising yields due to late bookings by guests.
In the retail sector, the pace of negative rental revisions moderated, while industrial rents are bottoming with the odds of a recovery next year increasing.
Song says the office sub-sector remains DBS’s preferred S-REIT with Capitaland Commercial Trust (target price $2.12) as its top pick given sustained improvement in office rents.
DBS has also advocated a larger weighing in the industrial sector which is now 12 months away from a recovery in rents ahead of hospitality REITs which was the research house’s second favourite sector.
Ascendas REIT ($3.00) and Mapletree Logistics Trust ($1.53) are DBS’s preferred industrial REIT picks while the remain bullish on CDL Hospitality Trusts ($1.95) for its attractive valuation.
“Our top retail pick is Frasers Centrepoint Trust ($2.45) due to the strong near term DPU growth owing to the completion of asset enhancement initiatives (AEIs) at Northpoint City. Upside will come from potential acquisitions,” adds Song.
As at 11.12am, units in AREIT, CCT, MLT, Suntec REIT, CDLHT and FCT are trading at $2.71, $1.77, $1.25, $1.88, $1.53 and $2.27 respectively.
