CGS-CIMB says that S-REITs’ underperformance so far this year appears to have priced in a 50 basis point (bp) of interest rate hikes. “Anecdotal evidence shows that performance of S-REITs tends to be choppy as the market digests the expectations of rate hikes. However, SREITs’ performance tends to catch up, when the hikes begin, as tapering signals an improving economic outlook, which should boost the rental and capital value outlook in the medium term,” CGS-CIMB says.
In the recent results update, retail and industrial REITs showed slight q-o-q improvements in rental reversions. CGS-CIMB expects the recovery to continue at a moderate pace as borders reopen and on robust economic activity. On occupancies, industrial REITs saw portfolio take-up rates inching up q-o-q while retail REITs’ take-up rates generally stayed stable.
Occupancy for office REITs was dragged by some frictional vacancies but landlords remained confident about backfilling the vacated spaces this year amid single-digit positive rental reversions. While elevated inflation could mean a rise in operating costs, inorganic growth prospects could provide another growth driver for S-REITs.
CGS-CIMB is expecting DPU to grow by 6-7% in FY2022 and another 3% in FY2023,
Offsetting the impact of yield spread compression due to rising rates. “We do not believe the impact of rising rates will have a significant impact on earnings and valuations. By our estimates, a 0.1% pt rise in average cost of borrowings and cost of equity could impact S-REITs’ DPU by 0.2-1.9% and DDM-based valuations by 1.4%-3%.”
Photo: Albert Chua
