SINGAPORE (Feb 14): CIMB is maintaining its “underweight” on S-REITs, forecasting DPU growth to be muted in view of the uptick in Fed fund rates and wary of capital depreciation.
In a Tuesday report, lead analyst Yeo Zhi Bin says REITs have relatively underperformed developers (+13.2%) and the STI (+7.6%), and believes the trend would continue in 2017.
Yeo says a rising interest rate environment could pose higher financial costs, difficulty in raising capital and potential cap rate expansion in the medium term.
The operational performance of REITs in 4Q16 also continues to deteriorate on a sequential quarterly basis, he adds.
Even though portfolio occupancies were stable, Yeo says REITs experienced a larger degree of negative rental reversions towards the end of the year.
In addition, small-cap industrial and hospitality REITs have made devaluation losses, reflecting the continued headwinds of both sectors, although office and retail capital values have been stickier.
All-in financial expenses also crept up about 5-10 bps q-o-q.
Meanwhile, the physical market is moving towards the tail-end of the supply cycle although there is the 2017 “tower of supply” to contend with.
“We expect rents to decline a further about 5%, and for vacancies to peak in 2017, before recovery can take place,” says Yeo.
Also, Yeo expects greater downward pressure on rental reversions in 2017, though pressures could alleviate going into 2H17.
Given the negligible incoming supply and Singapore’s focus on higher-value activities, Yeo believes business parks would be the first to recover.
Next, he expects the office market to evolve into a two-speed market, with Grade A CBD bottoming out at end 17.
It is difficult to say whether retail, griped by structural challenges, would recover. But we expect suburban malls to remain resilient.
Given the strong completions, Yeo advises avoiding warehouses and hotels.
CIMB would only add Mapletree Industrial Trust (TP $1.68) and Parkway Life REIT (TP $2.58) given their defensiveness.
“MINT’s visible DPU growth would enable it to buffer against rate hikes while PREIT’s defensive rental structures make it the most defensive S-REIT,” adds Yeo.
MINT and PREIT are trading at $1.66 and $2.45 respectively.
