SINGAPORE (Oct 16): RHB is reiterating its “overweight” rating on Singapore REITs (SREITs), as it believes that selective SREITs still offer value for investors, despite lingering concerns over rising interest rates.
In a Tuesday report, analyst Vijay Natarajan says, “While we do not expect a broad-based sector outperformance, we believe SREITs with stock-specific catalysts continue to find favour.”
Currently, SREITs are trading at an average yield spread of 380 basis points to the Monetary Authority of Singapore’s (MAS) 10-year bond yield.
In terms of price-to-book ratio, the sector is now trading at par to the 10-year average mean of 0.98 times. The analyst believes that although valuations are closer to the mean, they are not stretched as SREITs tend to trade at a premium when the growth outlook is positive.
“Additionally, we note that SREITs still offer the highest yields among REITs globally and believe defensive plays like REITs will still find favour with investors due to the volatile macroeconomic environment,” says Natarajan.
The research house’s top “buy” picks for SREITs are Ascendas REIT with a target price of $2.90, CDL Hospitality Trust with a target price of $1.80, Starhill Global REIT with a target price of 80 cents, and Manulife US REIT with a target price of 92 US cents.
While the threat of faster rate hikes remains, the analyst believes SREITs are in a relatively better position on a positive demand outlook on economic growth; oversupplying threat fading away; better-equipped balance sheet positions; and inorganic growth potential.
On the other hand, the latest en-bloc cycle has resulted in liquidity injections of about $19 billion in en-bloc sales from 2017 to 2018, a lot of which have yet to be disbursed.
“We believe there is a good chance the excess liquidity from en-bloc sales can flow into relatively defensive REIT stocks, owing to their attractive yields and liquidity,” says Natarajan.
SREIT's balance sheets also show that they are well-prepared to face the current rate hike cycle.
On average, close to 80% of REIT debts are hedged, with only less than 20% of total debt due for renewal up until 2020. Overall, sector gearing also remains modest at 36%, well below the 45% maximum threshold.
Moreover, many REITs have been seen diversifying their funding options to include instruments like perpetual securities, retail bonds and medium-term notes, and preferential offerings.
As at 11.05am, units in AREIT are trading at $2.48, CDLHT at $1.53, Starhill Global REIT at 67 cents, and Manulife US REIT at 78 US cents.
