SINGAPORE (Sept 5): OCBC Investment Research says the Singapore REIT sector remains a good defensive shelter for investors amid macroeconomic uncertainties.
For the S-REITs under its coverage universe, OCBC is projecting stable DPU growth of 1.7% for FY18/19 and 1.6% for FY19/20.
“Looking ahead, we have tempered our expectations for the hospitality sector, and now expect more muted DPU growth from hospitality REITs under our coverage,” says OCBC analyst Andy Wong Teck Ching in a Tuesday report.
In the recently concluded 2QCY18 results season, all 23 S-REITs under OCBC’s coverage reported results which met expectations. The average DPU growth came in at -0.8% on a y-o-y basis, versus -2.6% when compared to 1QCY18.
“Notwithstanding this overall decline, we note that 12 out of the 23 S-REITs recorded positive DPU growth, eight had negative growth while the remaining three saw no change in their DPUs,” says Wong.
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From a balance sheet perspective, Wong says the S-REITs under its coverage have remained prudent when it comes to capital management.
As at June 30, the average gearing ratio stood at 35.4% versus 35.3% at the end of 1Q18 while the proportion of borrowings hedged or fixed increased to 75.1% from 73.9%.
This has been supported by the stabilisation in the Singdollar interest rate swaps, which declined slightly from May highs, although still higher than start of the year.
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To recap, 2QCY18 saw the emerging trend of S-REITs venturing into new geographical markets.
Ascendas REIT (A-REIT) acquired a portfolio of 12 logistics assets in the UK. A-REIT and Mapletree Logistics Trust were also particularly active when it came to capital recycling.
Looking ahead, OCBC expects some near-term respite for the S-REITs sector as the Singapore government 10-year bond yield has eased about 29 bps to 2.40% as at Sept 3 from its YTD peak of 2.68% in May.
“We are cognisant that the current forward yield spread remains relatively tight at 363 bps, or 1.1 standard deviations below the five-year mean (408 bps),” says Wong.
However, the ongoing macroeconomic uncertainties emanating from the US-China trade friction and worries over economic contagion from Turkey have dampened investors’ sentiment and resulted in a flight to defensive ideas.
During the recent Jackson Hole symposium, Federal Reserve Chairman Jerome Powell highlighted that there is no clear sign of inflation overshooting above 2%, and reiterated the Fed Committee’s view that the gradual process of normalisation remains appropriate.
“We thus believe S-REITs can warrant a strategic position in investors’ portfolio, but in a selective manner,” says Wong.
Overall, OCBC remains “neutral” on S-REITs. Its preferred picks are Mapletree North Asia Commercial Trust (MAGIC) with $1.42 fair value, Keppel DC REIT with $1.54 fair value, Frasers Centrepoint Trust with $2.49 fair value and Frasers Logistics & Industrial Trust with $1.18 fair value.
As at 3.20pm, units in MAGIC, KDCREIT, FCT and FLT are trading at $1.17, $1.37, $2.28 and $1.10 respectively.
