“Using our FY2024 DPU estimates and peak/trough yield spreads over the past few cycles, our assessment indicates that share prices have recovered to their long-term average level,” the analysts write. “Assuming DPU projections remain unchanged, the next upcycle would likely come from the compression of the 10-year bond yield, which would widen yield spreads, rendering valuations more palatable. A pivot down in interest rates would be key to this development.”
With interest rate cuts set to happen this year, most analysts have turned positive on S-REITs, which are expected to see a resumption of DPU growth in FY2024. “We expect REITs to outperform the Straits Times Index (STI). This is evident from the past two periods of rate pauses, 2006–2007 and 2019. The same has held true thus far in the current pause,” say DBS Group Research analysts Yeo Kee Yan and Foo Fang Boon.
Similarly, CGS-CIMB Research’s Lock Mun Yee and Lim Siew Khee have kept their “overweight” rating for the sector. However, drawing reference to the past two periods of rate pauses as example, the analysts see that the path to normalised rates would be data-dependent as US inflation data remains elevated. As such, they expect unit prices in S-REITs to remain “choppy” in 1HFY2024.
