Analysts from PhillipCapital and UOB Kay Hian are remaining positive on the Singapore REITs (S-REITs) sector as the economic recovery gathers pace.
PhillipCapital analyst Natalie Ong is keeping her “overweight” call on the Singapore REITs (S-REITs) sector as its recovery is still ongoing.
The FTSE REIT Index’s recovery lagged the Straits Times Index (STI) and the FTSE Real Estate Developer Index year-to-date (y-t-d), notes Ong in an Aug 24 report.
Across the board, leasing in the sector remains challenging although it is seeing improvements q-o-q. S-REITs, in general, have been active in transactions, with many of them picking up new assets over the last six months.
“Portfolio reconstitution should keep portfolios future-ready while disbursements of divestment gains and contributions from acquisitions could help DPUs recover faster,” Ong suggests.
Several S-REITs are also exploring redevelopment and asset enhancement initiatives (AEIs), which should result in faster distribution per unit (DPU) growth later on.
Re-rating catalysts for the S-REIT sector include a pick-up in the Singapore economy as well as portfolio reconstitutions, she says.
The REITs under PhillipCapital’s coverage are expected to deliver DPU yields of 3.9-7.9% in the FY2021.
Among the sub-sectors – office, industrial, retail and hospitality – Ong has indicated her preference for industrial and retail.
The industrial sub sector has seen rents and occupancy rates improving for the fifth consecutive quarter. Occupancy stood 0.1 percentage points higher q-o-q at 90.1% on average lifted by factory occupancies. Industrial rents grew 0.5 percentage points y-o-y and 0.3 percentage points q-o-q with improvements in factory and warehouse rents.
The retail market is also finding its footing, adds Ong. Year-to-June net absorptions were 12,000 sqm were higher than 2020’s -72,000 sq m net absorptions, she notes.
Occupancy stood the same q-o-q, while the rental index declined by 0.5%.
That said, retail REITs have reported an improvement in signing rents with reversions “less negative” than that of the preceding quarter.
To this end, Ong has identified her top picks as Frasers Centrepoint Trust (FCT) and Ascendas REIT (A-REIT).
She has given them “buy” calls with target prices of $2.87 for FCT and $3.65 for A-REIT.
UOB Kay Hian analyst Jonathan Koh has, too, kept “overweight” on the S-REIT sector as the economy is expected to gather pace with the acceleration of the Covid-19 vaccination rates in Singapore and many developed countries.
However, Koh predicts that the sector may experience a “mild correction” prior to the onset of the quantitative easing (QE) taper, although total return and relative performance should turn positive, he says in an Aug 27 report.
“S-REITs could potentially suffer moderate negative total return prior to the onset of a QE taper in 2H2021. However, there is no indication that S-REITs would incur negative total return or underperform the broader market during tapering and immediately after the tapering,” he writes.
The Fed has conducted QE twice so far. The first instance took place in three rounds, which lasted between 2008 to 2013 during the aftermath of the Global Financial Crisis (GFC). The second instance occurred during the ongoing Covid-19 pandemic that began in March 2020.
Before the commencement of QE1, the FTSE ST All-share REITs Index incurred a total negative return of 3.3% during the three-month period. S-REITs provided a total positive return of 16.1% and outperformed the MSCI Singapore by 9.7% during the process of tapering in 2H2013 and 2014, he notes.
S-REITs also provided a positive total return of 7% during the three-month period after the cessation of QE3.
This time, the Fed could push for an earlier start for QE tapering, as some FOMC participants have requested for it in late 2021.
Hikes in the Fed Funds Rate could commence as early as mid-2022, says Koh.
Fed chairman Jerome Powell, in December 2020, promised to indicate “well in advance” of any decision for a QE taper.
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In his report, Koh has recommended investors have a “balanced mix” of new economy and re-opening plays. New economy plays include ARA LOGOS Logistics Trust, A-REIT, Frasers Logistics Trust (FLT) and Mapletree Industrial Trust (MINT). Re-opening plays include FCT and Lendlease Commercial Global REIT (LREIT).
Koh has recommended “buy” on all six S-REITs, with target prices of $1.02 (ARA LOGOS), $3.83 (A-REIT), $1.79 (FLT), $3.63 (MINT), $3.06 (FCT) and $1.01 (LREIT).
Sector catalysts include the normalisation in economic activities and GDP growth on the back of a higher number of Singapore’s population being fully vaccinated in September.
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