SINGAPORE (May 16): RHB Research is maintaining its “overweight” on S-REITs despite market worries over higher interest rates, preferring the hospitality and industrial sub-sectors which are poised to tap into demand growth.
Key to the improving market outlook for S-REITs is a pickup in broad-based demand and supply tapering across most sub-segments. When it comes to balance sheet strength, S-REITs are generally well prepared with 80% of debts are hedged to mitigate rising interest costs. Many have also started exploring new markets in their quest to deliver inorganic growth and diversify their presence.
S-REITs are currently trading at a 330bps spread to the Singapore’s 10-year bond yield. By comparison, the 10-year average mean spread stands at 410bps – excluding the Global Financial Crisis (GFC) peaks.
In a Wednesday report, analyst Vijay Natarajan says S-REITs are in a better position as improving economic conditions have resulted in a better demand outlook, which should filter down to DPU growth; the oversupply threat is beginning to fade away and S-REITs are also expected to deliver inorganic growth from recent acquisitions as balance sheet positions remain strong.
Natarajan says S-REITs are well-positioned to capture this uptrend and outperform their peers. “Overall, we expect the S-REITs under our coverage to deliver DPU growth of 2% for 2018, with the hospitality and industrial sub-sectors contributing 4% and 3% DPU growth,” says the analyst.
RHB’s analysis of S-REITs’ debt profiles show that most of the S-REITs are well-prepared for the current rate hike in this cycle when compared to the past. On an average, close to 80% of S-REITs are currently hedged, with only a minimal 9% of debts expiring this year.
“S-REITs’ average gearing also currently stands at the 35% level, which is well below the maximum allowable threshold of 45%. Thus, we do not expect S-REIT interest cost expenses to rise up drastically in the near term,” says Natarajan.
With cap rate compression still in play in Singapore and Australia, many S-REITs also indicated their plans to explore new geographies. This includes the US and Europe. On the capital structure front, more S-REITs are exploring the addition of perpetual securities as a mode of fundraising – this is in order to avoid breaching gearing thresholds. Additionally, many S-REITs have also activated dividend reinvestment programme (DRP) schemes to boost their equity bases.
Units in Ascendas REIT, Cache Logistics Trust, CDL Hospitality Trusts, Manulife US REIT and OUE Hospitality Trust are trading at $2.64, 80 cents, $1.69, 94 cents and 80 cents respectively.
