While Phillip Securities remains downbeat on certain segments of the real estate investment trust (REIT) market, the brokerage has maintained its “overweight” stance on the whole sector.
It notes that economic indicators, such as manufacturing output, non-oil domestic exports and retail sales, have been improving since June.
Moreover, most of the REIT tenants have remained “current with their rents”, abating concerns that they may have to provide additional rental support.
“We think the worst could be over except for hospitality, barring a second pandemic wave,” Phillip Securities analyst Natalie Ong writes in a note dated Oct 19.
Phillip Securities says it prefers the commercial and industrial sub-sectors due to tapering office supply, asset enhancement initiatives and redevelopment opportunities.
These two sub-sectors remain relevant and stable despite the pandemic, it says.
For instance, the brokerage favours US office REITs due to their long weighted average lease expiries (WALEs) and downside protection from remote working adoption.
However, Phillip Securities says it would hold off from upgrading the retail sub-sector pending signs of sustained leasing demand to compensate for their shorter WALEs.
Although tenant sales at suburban malls have recovered to pre-Covid-19 levels, central malls are struggling to catch up with a lack of tourist spending, it notes.
The brokerage also remains cautious on hospitality REITs due to continued restrictions on international travel.
