Singapore’s REITs are slowly, but steadily, improving, say HSBC Global Research analysts Joy Wang and Rayson Khoo in a May 15 note. S-REITs are in better shape than they were two years ago, and a higher-for-longer rate scenario is the analysts’ base case.
The shift in interest rate expectations has pushed out hopes for a quick reboot to the S-REIT sector, say Wang and Khoo. “However, we are seeing financial metrics stabilising on margins, despite volatility in interest rates.”
Most S-REITs have reported resilient operations in their latest set of results for the January-to-March quarter, with certain metrics, such as rental reversions, coming in stronger than expected, they add.
Although the sector is “not totally out of the woods yet”, HSBC thinks S-REITs are in a better position with higher-for-longer now a base case and book valuations adjusted lower with limited downside risks.
“Moreover, many REITs are divesting non-core assets, which could help to de-leverage and support growth,” says HSBC.
Among the S-REIT subsectors, HSBC prefers retail and logistics names. Among these, Wang and Khoo’s top picks are CapitaLand Integrated Commercial Trust C38U (CICT) and Mapletree Logistics Trust M44U (MLT).
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“We continue to favour stocks with embedded growth such as CICT. We also like REITs that have priced in most of the negative news and could see potential earnings upgrades such as MLT,” they add.
Meanwhile, they have cut their target prices for CapitaLand Ascendas REIT A17U (CLAR), Frasers Logistics & Commercial Trust BUOU (FLT), Mapletree Pan Asia Commercial Trust N2IU (MPACT) and Suntec REIT.
Mapletree REITs in focus
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MLT, in particular, has been upgraded to a “buy” with a $1.65 target price. Along with MPACT and Mapletree Industrial Trust ME8U (MINT), the trio reports with a March year-end.
“We believe that the market has overly focused on negative rental reversions in mainland China while ignoring the strength in its other markets,” say Wang and Khoo of MLT, whose portfolio spans nine markets.
Just last week, MLT sold a warehouse at Tuas for $10.5 million. “With divestment momentum picking up from an extremely low base and with its valuation looking attractive on a clean distribution per unit (DPU) basis, we see risk and reward skewed on the upside,” say Wang and Khoo.
Too early to return to office
Despite a U-turn in Grade A office rents in 1Q2024, Wang and Khoo remain cautious on the Singapore office sector.
They expect a prolonged down cycle with rental declines pushed more into 2025.
“Though the delay in completion of IOI Central Boulevard and its pricing strategy has given other landlords more breathing space, the lack of new demand together with a structural shift in space requirements will eventually drive the decline in rental as vacancies start to increase in late-2024,” say Wang and Khoo.
The IOI Central Boulevard office building was supposed to have opened in 2022. With two towers and anchor tenants Amazon and Morgan Stanley, it is set to open this year.
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“Having pushed out our rental decline towards 2H2024 and 2025, we now expect a milder rent decline of 5% in 2024,” say Wong and Khoo. “Nevertheless, Singapore is one of the better-performing office markets globally and should continue to attract investment capital.”
Key risks
That said, interest rate volatility remains one of the key risks, say the HSBC analysts. “We estimate that every 50-basis point swing in rates could have a 10% valuation impact on the stocks we cover.”
They also highlight the risk of a prolonged standstill in the transaction market. This would result in REIT managers being unable to execute divestments and thus, unable to improve their balance sheets and growth.
