SINGAPORE (Nov 30): OCBC Investment Research is maintaining its “neutral” rating on Singapore REITs (S-REITs) as it projects a 2.8% DPU growth for S-REITs in the next financial year.
In the 3Q calendar year (CQ) earnings season this year, all 24 of the S-REITs under the research house’s coverage recorded results that met its expectations.
However, overall DPU growth dipped marginally by 0.2% y-o-y, dragged down largely by Ascott Residence Trust (ART) when it announced that its 3Q DPU fell 28% due to dilution from a rights issue exercise earlier this year.
See: Ascott REIT 3Q DPU falls 28% to 1.69 cents on one-off items
For the entire S-REITs universe, based on Bloomberg consensus forecasts, simple average DPU growth is expected to come in at 0.7% and 1.1% for the current and next financial year periods, respectively.
In a Thursday report, analyst Andy Wong Teck Ching says, “Should the global economic recovery momentum continue to gain traction, there could potentially be upside to DPU forecasts.”
OCBC has retained Frasers Centrepoint Trust (FCT) and Frasers Logistics & Industrial Trust (FLT) as its top “buy” picks in 2018 with target prices of $2.40 and $1.25 respectively.
Keppel DC REIT has however been removed on valuation grounds as the stock has performed strongly.
Among the various REIT sub-sectors, the analyst believes that the office sector is poised to see the strongest recovery in rents, driven by improving macroeconomic fundamentals and tapering off of new supply in 2018.
In 3Q17, core CBD office rents reached an inflation point and Wong projects further rental increments of up to 10% in 2018. But he believes that these positives have already been priced in by the market as the major office REITs are offering unattractive distribution yields of about 5% or less.
Furthermore, hospitality REITs are in the running for a brighter 2018 as Singapore’s headline tourism recorded robust figures. Market watcher Horwath HTL believes that hotel room supply will increase by 1.7% or about 1,100 rooms in 2018 and 2.2% or 1,500 rooms in 2019.
However, this figures are a lower magnitude than what is expected in 2017. Coupled with the analyst’s expectations of a recovery in demand, RevPAR is expected to rebound slightly in 2018, as there will likely still be some softness in 1H18.
“We do not see any compelling ideas within the hospitality space at the moment as markets have likely priced in this recovery story, in our view,” says Wong.
On the other hand, the other sub-sectors are expected to see lower supply coming on stream, with the exception of retail.
“However, we continue to like retail REITs with well-positioned suburban malls which would buttress their resilience,” says Wong.
Despite the improving fundamentals, the analyst remains cautious on the sector’s valuations as it appears stretched. But he believes that selective opportunities remain, as liquidity in the markets will continue to drive the yield compression theme for quality names.
As at 11.25am, units in FCT and FLT are trading at $2.21 and $1.09 respectively.
