PhillipCapital analyst Darren Chan is maintaining his “overweight” rating on Singapore REITs (S-REITs) amid expectations of rate cuts from the US Federal Reserve (US Fed).
The Federal Open Market Committee (FOMC), at its Dec 13 meeting, signalled that it will cut rates by a total of 75 basis points (bps) to between 4.5% to 4.75% in 2024. The FOMC had kept the federal funds rate unchanged at 5.25% to 5.5% at that same meeting.
“This will be a tailwind for REITs, and we expect a sector recovery in 2024-2025,” says Chan. “However, we think it will remain challenging for S-REITs (apart from the hospitality sub-sector) to grow [their] distribution per units (DPUs) with higher borrowing costs and forex headwinds expected.”
As at the analyst’s report on Dec 15, S-REITs are now trading at a forward dividend yield of around 6.4% or 0.4 times standard deviation (s.d.), above the mean of 6.1%. The sector is also trading at a P/NAV of 0.86 times, 2 times s.d. below the mean of 1.03 times.
As such, he believes that now is a good time for investors to reposition themselves into the sector for the eventual interest rate pause and decline.
Among the REITs, Chan continues to prefer REITs that have healthy balance sheets, strong sponsors and improving metrics such as those in the hospitality and retail sub-sector.
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“We think the hospitality sub-sector will be able to generate the most DPU growth on the back of higher revenue per available room (RevPAR) and the gradual reopening of China as outbound flight capacity from China increases,” he says.
“Suburban retail offers resilience in a downturn while downtown retail stands to benefit from the recovery of international visitor arrivals, which will in turn lift tenant sales and sentiment,” he adds.
His top picks are CapitaLand Ascott Trust HMN (CLAS) and Frasers Centrepoint Trust J69U (FCT). Chan has given them both “buy” calls with target prices of $1.04 and $2.29 for CLAS and FCT respectively.
As at 12.34pm, units in CLAS and FCT are trading at 96.5 cents and $2.22 respectively.
