While Guha expects that counters will be range-bound in the short term “following a 15% run up” in the last three months, he maintains a “positive mid-term outlook”. The change in interest rate trajectory is “supportive” for the sector bolstered by associated benefits such as sector flows, transactions, asset values and recycling. Guha maintains his estimates, ratings and target price while shifting his preferred picks to include higher yielding and more geographically diversified REITs.
The Fed’s rate cut “should keep discount rates capped and raise the odds of earlier-than-expected growth in distribution”, however, “hawkish commentary is likely to keep the counters running ahead of fundamentals”, Guha adds.
Further to his report, Guha noted that the Fed’s 50 basis points (bps) cut was in line with market expectations and was not “an incremental positive or negative.” He recognises that Singapore-REITs (S-REITs) have benefitted from a lower discount rate with the Singapore dollar (SGD) 10-year yield down 60bps since mid-July.
Guha expects distribution growth for S-REITS to arise earlier than expected if the rate cuts continue to be front loaded without sacrificing growth. The current consensus and Maybank Investment Bank Group expect y-o-y distribution to fall in Fiscal Year 1 but growth in Fiscal Year 2. According to Guha, S-REITs which faced foreign exchange (FX) headwinds may stand to gain from stronger regional currencies following real yield differential leading to lower implied rates.
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However, Guha remains cautious given inflation driven by shelter and services. Rate cuts tend to occur “asynchronous globally” and Taiwan, South Korea and Australia have experienced increasing house prices, he adds. A change in MAS’s policy stance is likely to impact the SGD yield curve. Guha states that banks are unlikely to change their supportive margin stance on loans.
Based on the disclosures until June, Suntec REIT, CDLHT, Keppel REIT (KREIT), OUEREIT and FEHT have the “highest distribution per unit (DPU) sensitivity to rate cuts”, Guha says, experiencing a 3.4% increase in distribution for every 50bps rate cut, on average.
Further to the report, recent hotel stats have shown that regional school holidays led to a post-pandemic high of 1.6 million visitors in July, before dipping to 1.54 million in August. Room rates in July were at $278.30, rising 5.3% m-o-m, but falling 3.2% y-o-y. Revenue per available room (RevPAR) was up 21% m-o-m, but fell 4.7% y-o-y, with only RevPAR for the luxury segment growing y-o-y.
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The last time visitor arrivals were at 1.6 million was in April 2019, which saw hotels registered room rates and RevPAR at $215 and $185, respectively. Guha suggests that this is due to a change in the arrival mix and, or inelastic demand. Another possible reason could be that supply is being managed more holistically across the industry, Guha adds.
Guha further notes that year-to-date RevPAR is $227 and it is expected that upcoming events and potential of increased transient corporate travel will drive demand, achieving his 2024 target of $235.
