SINGAPORE (Mar 3): As investors grapple with the possibility that the Covid-19 outbreak may be more prolonged than initially expected, this may just be the right time to cash in on Singapore REITs (S-REITs).
Although highly sought after for their yields and stability, S-REITs have not been immune to the increasing macroeconomic uncertainty. The sector has been a victim of a broad-based sell-off of up to 4-5% in a day as a result of funds outflow.
To be sure, the 10-year US treasury yield now stands at a multi-year low of some 1.3%, with the Singapore 10-year bonds tailing it at some 1.5%. Market watchers believe that these are in tandem with heightened worries of an economic fall-out.
This has resulted in the prices of S-REITs being dragged down 6.5% from the previous week, and 5.6% year-to-date.
While the fall is enough to send some investors scurrying back to “safer” assets such as gold, DBS Group Research is quick to advise otherwise.
“We see the broad-based sell-off as an opportunity to accumulate S-REITs on expectations that the low interest environment and high headline yields will attract investor interest back to S-REITs after the market stabilises,” says analyst Derek Tan in a Tuesday report.
In particular, Tan highlights how the flattening of yield curves for S-REITs is similar to back in the period of August-September last year when there was a similar sell-off due to concerns of a recession.
“If history is repeated, such sell-offs are good opportunities to accumulate as this does not last and S-REITs tend to bounce back stronger,” says Tan.
“The immediate catalyst is if the FED cuts rates in March 2020, which will provide some respite to yield stocks like the S-REITs,” he adds.
Segmentally, analysts remain optimistic on hospitality REITs, and are choosing to believe that the negatives have already been priced into stocks such as Ascott Residence Trust (ART) and Far East Hospitality Trust (FEHT). These stocks are currently trading at -1 standard deviation on a five-year price to net asset value (P/NAV) basis.
“[We] see opportunities for ART and FEHT at current levels given the high proportion of fixed revenues which would support yields of 5.0%. Strong Sponsor support provide us with comfort that these fixed rent obligations are likely to be paid,” says Tan.
“Assuming zero variable income, ART and FEHT are projected to still deliver yields of up to 4.7% and 4.9% respectively, based on current prices,” he adds.
Although the outlook for the hospitality sector remains clouded, hotel occupancy rates are still hovering around the 50% level. This, according to Tan, indicates that the worst may not be as bad as initially feared.
The way Tan sees it, another subsector that is likely to face a minimal and indirect impact from the Covid-19 outbreak is industrial REITs - a segment that has held up better thus far due to its perceived stability and higher relative growth prospects.
The brokerage is leaning towards REITs with longer weighted average lease expiry (WALE) supporting distributions. Exemplars include Ascendas REIT, Mapletree Industrial Trust and Ascendas India Trust.
Selected Singapore and US office REITs such as Keppel REIT, Suntec REIT and Mapletree Commercial Trust have also piqued the interest of DBS as they look to increase distributions through acquisitions.
After the temporary storm blows over, DBS is anticipating the emergence of trends such as flexible working arrangements after the recent business continuity plans wane, which will translate to smaller office real estate needs.
Additionally, the brokerage is expecting a stronger demand for warehouses amid a higher demand for online purchases in sectors such as F&B, as consumer habits shift after a period of adjustments.
Looking ahead, Tan stresses that there is no running away from S-REITs as they are likely to remain a core investment sector in the global economy.
“In the medium term, we believe S-REITs will continue to be an important and relevant component of investors’ portfolio, especially given the sector’s increasing representation in major indices (current and future) such as the MSCI, STI, EPRA Nareit Developed World Index,” says Tan.
“Coupled with high yields of 5.5%, investors will eventually be drawn back into the S-REITs sector,” he adds.
