Maybank Kim Eng analyst Chua Su Tye has kept “positive” on Singapore REITs (S-REITs) though he says he sees heightened volatility ahead for the sector, which could lead to valuations remaining under pressure.
S-REITs have retreated by 5% since January, underperforming the market by 9% against rising inflation expectations and a steepening yield curve.
That said, Chua has remained positive on fundamentals as the sector is past its rent relief cycle. Overseas diversification has also strengthened distribution per unit (DPU) visibility for S-REITs, he notes.
On that, Chua has indicated that he prefers retail and industrial S-REITs in that order, followed by office and lastly hospitality REITs.
“Retail names have jumped 19-23% since November 2020, with valuations backed by 8%-20% DPU growth and 5-7% FY2021 yields,” he writes in a March 17 report.
“We see favourable risk-reward for industrial REITs, with acquisition growth levers set to come back in play,” he adds, identifying top “buys” as Ascendas REIT (A-REIT), CapitaLand Integrated Commercial Trust (CICT), Mapletree Commercial Trust (MCT) and Frasers Centrepoint Trust (FCT).
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As we move past FY2020 and factor in acquisitions announced post-results, Chua has adjusted FY2021 DPUs by -4% to +5%.
“While long term interest rates have lately risen, our sensitivity analysis suggest that every 50 basis points change in refinancing costs would impact our DPUs by 1-6%,” he says.
“Our dividend discount model (DDM) valuation methodology stays consistent across the sector with changes to our target prices (- 10% to +6%) reflecting adjustments to our COE assumptions. Our sensitivity analysis suggests that every 50bps change in our risk-free rate assumption leads to a 3-12% change in valuations,” he adds.
On industrial REITs, Chua highlights that he remains positive on the sub-sector as they are set to deliver positive DPU growth and accretive acquisitions post-FY2020 as they pick up the pace from 2QFY2021.
For retail REITs, Chua says he forecasts 8-20% two-year DPU CAGR for retail REITs, implying FY2021 dividend yields of 5-7%.
“With 11-34% appreciation since November 2020, risk-reward for hospitality is less compelling. Progress on vaccine rollout and progressive border reopening towards year-end are catalysts, but revenue per average room (RevPAR) visibility is poor, while the street and us have pencilled in around 25% RevPAR growth in 2021 and 15% in 2022,” he says.
“We remain negative on offices given tenant downsizing risk, exacerbated by increasing remote work practices,” he adds.
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To this end, Chua says he doesn’t see a replay of 2013 taper tantrums for S-REITs moving forward.
“S-REITs now have clearer growth mandates and opportunities, with the still low interest rate backdrop set to support further overseas diversification initiatives,” he says.
“Accretive acquisitions funded by debt could lift DPUs by 15% on average, assuming headroom is all-deployed,” he adds.
