DBS Group Research says the recent correction in prices for big industrial Singapore REITs (S-REITs), which dropped 18% from its recent peak, presents a good opportunity to buy.
DBS analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong say that the decline in prices follows a spike in 10-year yields on the back of inflation fears, as well as rotational interest into cyclical subsectors including office, retail and hospitality.
The analysts note that the correction closely mirrors the 21% peak-to-trough drop that happened in 2013 when yields shot up, and believe that the correction is largely done as yields taper off.
"With most of the spike in yields largely done (according to our interest rate strategists), we believe that a period of share price stability will return," they say.
The recommendation to buy is underpinned by DBS' expectations that the REITs' distribution per unit (DPU) for FY2021 ending December 2021 will grow 7% y-o-y on the back of acquisitions, which is 2.5% higher than FY2019, or pre-pandemic, levels.
“We believe that large cap industrial S-REITs remain in a virtuous cycle of acquisition growth, with the ability to deliver on accretive deals to drive upside to our circa 7% growth in DPU estimate,” they explain.
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In addition, the analysts note that yield spreads are back to pre-Covid-19 levels. “The large cap industrial S-REITs trade at a FY2021 yield of 4.9% (spread of circa 3.3%), in line with pre-pandemic days,” they say.
The analysts view that the REITs are also well-positioned in terms of future growth prospects given their significant exposure to “new economy” assets which comprise specialised industrial real estate such as business parks, logistics, and datacenters.
They note that the REITs have close to 77% in these asset classes compared to around 60% back in 2013, which should accelerate their growth prospects with lower earnings risk.
DBS’ top picks are Ascendas REIT (A-REIT) and Frasers Logistics & Commercial Trust (FLCT) due to their yield spreads of around 4.1% that beat pre-pandemic levels and offer good value, as well as Mapletree Logistics Trust (MLT) for “its Asia Pacific footprint and pivot into the Indian logistics space”.
All three picks are rated ‘buy’ with target prices of $4.00, $3.25, and $2.35 respectively.
As at 12.36pm, shares in A-REIT are 4 cents or $1.38 higher at $2.95, shares in FLCT are 1 cent or 0.72% higher at $1.40, while shares in MLT are 5 cents or 2.78% higher at $1.85.
