After two false starts for rate-cut rally, Macquarie Equity Research has initiated coverage on 11 Singapore REITs, naming CapitaLand Ascendas REIT A17U (CLAR), Keppel DC REIT (KDC REIT), Mapletree Logistics Trust M44U (MLT) and Mapletree Pan Asia Commercial Trust N2IU (MPACT) as their top picks.
Analysts Rachel Tan and Jayden Vantarakis’s target price for CLAR, KDC REIT, MLT and MPACT are as follows: $3.28, $2.60, $1.65 and $1.60. The analysts believe investors have an opportunity to accumulate S-REITs which now trade at pre-rate-cut trough valuations.
At end 2023, S-REITs rallied about 30% on expectations of rate cuts, but reverted to the low when the US Federal Reserve (US Fed) kept rates stable. After September’s rate cut, S-REITs rallied about 25%, but the gains were fully reversed once again post-US elections, the analysts note.
Singapore REITs now trade at about 6% yields, close to pre-rate-cut trough levels. As such, Tan and Vantarakis believe that downside risk is limited for potential of about 20% to 60% upside, should economic outlook change for the better or if neutral rate is expected to fall below 4%.
The analysts say that among their S-REITs coverage, they prefer higher Singapore asset contributions, and see optionality from further monetary easing.
Their preference for sectors is industrials, followed by retail, office and finally hospitality. Industrial and suburban retail are less cyclical, and these segments typically have more conservative balance sheets that could shield some impact from higher-for-longer interest rates, they say.
CLAR and KDC REIT are their industrial and data centre play picks, as CLAR has a diversified portfolio of new economy assets and is currently trading at an about 6% FY2025 yield, an attractive level in their view as asset recycling activities pick up.
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Meanwhile, KDC REIT is en route to be a proxy to AI development with a key catalyst from the accretive acquisition of Genting Lane data centres.
Tan and Vantarakis say that MLT and MPACT are “laggards”, noting that they are trading at trough levels and await potential recovery in China.
Macquarie’s analysts say that earnings are likely to bottom in FY2025, with most of the repricing of the remaining debt/hedges with low rates to be completed in FY2025.
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“Based on Fed rate cuts, we assume a 100 basis points (bps) cut for floating rates and a 50bp cut for debt refinancing rates; the impact to distribution per unit (DPU) is neutral to positive 3%. Assuming rates were to hold at this level in FY26, most S-REITs will have a slight positive impact on DPU,” they say.
