SINGAPORE (Nov 28): Macquarie Research is turning more cautious on Singapore real estate invest trusts (REITs) in 2018 as limited upside is expected for the sector.
While share prices of REITs have climbed some 17% year-to-date, Macquarie says further rises in long-term rates will put additional pressure on yield spreads – and in turn, share prices.
“The office sector remains our top REIT sector pick in Singapore, due mainly to potential for significant increase in book value as cap rates are compressed in-line with recent market transactions,” says Macquarie lead analyst Ken Ang in a report on Friday.
Meanwhile, Ang expects the residential sector to be propped up by pent-up demand as well as competitive mortgage pricing and positive consumer sentiment.
On the other hand, the hospitality sector remains Macquarie’s least preferred sector.
This is due to a high supply of new hotel rooms that is expected to put revenue per available room (RevPAR) under pressure, as well as a change in the mix of tourist arrivals, with an increase in visitors that are less likely to stay in upscale or luxury hotels.
In the middle of the pack are the industrial sector, which is expected to see improved occupancy rates on the back of lower supper moving forward, as well as the retail sector, which bears the brunt of digital disruption from increased online shopping platforms.
Among the REITs, Keppel REIT (KREIT) is Macquarie’s top pick, on the back of the potential of significant cap rate compression, inexpensive valuations, and healthy dividend yield.
“Given KREIT’s portfolio of largely high quality Grade A assets, we expect rent reversions to be positive in 2018, from current low passing rents of just approximately $9.3 psf,” says Ang.
Macquarie has an “outperform” rating on Keppel REIT with a target price of $1.30.
As at 4.52pm, units of Keppel REIT are trading flat at $1.25, implying an estimated book of 0.8 times and a dividend yield of 5.5% in FY18.
