Maybank Securities analysts Chua Su Tye and Li Jialin have maintained their “positive” rating on the Singapore REITs (S-REITs) sector, although with an eye toward rising interest rates and costs.
“Funding cost concerns have gained prominence with the Fed’s steepening
rate hike path,” the analysts write in their May 30 report.
As interest costs look set to rise after the 1QFY2022, the analysts have lowered their distribution per unit (DPU) estimates and target prices by 2% to 8% to factor in a “more aggressive interest rate growth profile”.
“Interest rate volatility remains high, with DPUs for industrial REITs better cushioned from further rate increases than office and hospitality,” the analysts say.
In the report, they have also noted that S-REITs had anticipated higher rates and pushed up their fixed-rate borrowings, to about 73% on average.
Gearing stayed low at about 37%, and interest cover is manageable at about 5x. He sees that the sector’s borrowing costs likely bottomed in 1QFY2022, and could increase by 100 basis points (bps) for floating-rate debt.
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This is based on the US Federal Reserve hiking a total of 275 bps this year. The analysts add, “assuming rates rise a further 50bps above our new base case, then DPUs could fall by another 1-5%, with the industrial REITs less sensitive due to lower gearing and higher fixed-rate debt.”
Separately, Chua and Li also highlight that the core consumer price index (CPI), having climbed to a decade high in April from surging electricity and gas prices, highlights near-term margin pressures for REITs with concentrated Singapore assets under management.
Electricity expenses represent 2%-15% of operating expensex for many REITs, but their margins are largely cushioned.
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Costs for some are recoverable from tenants due to pass-through leases, while others could see about 5% lower net property incomes and dividends in FY2022 and FY2023
Despite this, the analysts say that sector fundamentals are improving into 2HFY2022, with rents accelerating from demand growth and benign supply.
To this end, Chua and Li see capital recycling gaining pace, as fast-tracked divestment programs support acquisition pipelines.
In the note, they cites resilient occupancies and a stronger rental outlook for S-REITs, saying that increasing leasing momentum and tight vacancies should underpin a stronger rental growth outlook, especially as office landlords gain pricing power against tight supply.
The analysts maintain their rental growth forecasts, led by a 13% two-year CAGR for office rents, and 6% for retail assets.
In addition, they see that industrial rents have bottomed, and should climb at 2-5% per annum.
Revenue per available room (RevPAR) in the hospitality sector could jump 13%-17% y-o-y in 2022-23, with upside risk from China’s re-opening.
Chua and Li also expect the stronger-than-expected lift in revenues from higher rents and sales contribution for the commercial and hospitality REITs to offset their higher costs in FY2023.
“Our top ‘buys’ are Ascendas Reit, Capitaland Integrated Commercial Trust, CDL Hospitality Trust, and Suntec Reit as they trade at 5-6% yields and could deliver 5-22% DPU growth,” they conclude.
