SINGAPORE (Apr 16): Maybank Kim Eng is remaining “positive” on Singapore REITs (S-REITs), despite the recent pull-back in share prices against a rising interest rate regime.
In a Monday report, analyst Chua Su Tye says, “We see positive earnings momentum led by the large cap names from improving supply and demand, with near-term catalysts rising occupancies and stable/positive rental reversions.”
The analyst sees limited risks from higher interest rates given the sector’s well-cushioned balance sheets, with potential acquisition growth upside not priced in.
Valuations remain compelling, especially for Ascendas REIT (AREIT) and Mapletree Industrial Trust (MINT), given their headroom for accretive deals.
The research house has a “buy” recommendation on both the REITs with target prices of $3.05 for AREIT and $2.20 for MINT.
According to the analyst, S-REITs have been moving towards overseas diversification and the two REITs are best-placed to deliver on accretive deals, given their clear mandates and substantial debt headroom.
Meanwhile, right of first refusal (ROFR) pipeline assets could boost options against a backdrop of tighter cap rates.
“We also believe both divestment and redevelopment opportunities are being supported by the REITs’ longer land tenures - 50% of their assets exceed 40 years, a contrast to the 20-year tenures for new government land sale sites,” says Chua.
Investors are also likely awaiting completion of merger discussions between ESR-REIT and Viva, which could spur further consolidation activity amongst the small-cap names.
Overall in the S-REIT sector, leasing activity has jumped 35% y-o-y in the first two months of 2018, the strongest since 3Q13.
Hence, the analyst anticipates stronger leasing demand in tandem with improving manufacturing growth and a broader recovery in services.
However, industrial rents showed signs of bottoming out in 4Q17 at –0.1%, its slowest decline in 11 quarters. Chua expects this to stabilise in 2018 and forecasts 1-3% annual growth in 2018-2020.
“We see limited risks from rising rates given strong balance sheets, and valuations are supportive - AREIT’s yield-spread of 3.8% is above the SG 10-year government bond. However, this could lead to further rate tightening given a stronger rental recovery, as evident from earlier episodes,” says Chua.
As at 3.36pm, units in AREIT and MINT are trading at $2.67 and $2.04 respectively.
AREIT is currently trading at 1.1 times FY18 book, with a dividend yield of 6.2%; MINT is trading at 1.4 times FY18 book, with a dividend yield of 5.8%.
