As the world enters into the monetary easing cycle, PhillipCapital analysts Darren Chan and Liu Miaomiao see now as a good time for investors to reposition themselves into Singapore-REITs (S-REITs).
However, the analysts also expect to see “muted” growth in distributions per unit (DPUs) in FY2024 as higher finance costs continue to erode DPU.
In their June 24 report, the analysts note that the US Federal Reserve (US Fed) kept the federal funds rate unchanged at 5.25% to 5.5% for the seventh straight meeting on June 12 and now projects only one rate cut in 2024.
“It will need to see further positive signs that inflation is moving towards its 2% target before considering any rate cuts,” write Chan and Liu.
“With lower interest rates, S-REITs will benefit from lower financing costs, higher dividend yield spreads over bonds, and higher property valuations as cap rates compress,” they add. “Furthermore, we expect deal-making to pick up pace with the peaking of interest rates. Therefore, we expect a sector recovery in 2024-2025.”
The S-REITs Index performance was “lacklustre” in May, falling by 0.4% after already declining by 3.1% in April. CapitaLand India Trust CY6U (CLINT) was the top performer with a 6% gain while Frasers Hospitality Trust ACV (FHT) was the worst among the S-REITs after falling by 6.5%.
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Among the sub-sectors, overseas commercial REITs did the best in May with a collective gain of 1.8% while the worst performing sub-sector was “overseas diversified”, which was down by 2.1%.
As at the analysts’ reports, S-REITs were trading at a forward dividend yield of 6.5% and 0.7 times standard deviations (s.d.) above the mean of 6.1% and at a P/NAV of 0.85 times, and 2.1 times s.d. below the mean of 1.03 times.
They have maintained their “overweight” call on the overall sector with preferences for the hospitality and retail sub-sectors.
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“We think the hospitality sub-sector will remain resilient due to higher revenue per available room (RevPAR) and the return of Chinese travellers as outbound flight capacity from China increases. Suburban retail offers stability 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,” say Chan and Liu.
Among the sub-sectors, the analysts have kept “overweight” on hospitality and retail and remain “neutral” for office and industrial REITs.
“We think core central business district (CBD) Grade A office rents at $11.95 psf per month in 1Q2024 will come under pressure as the market absorbs the upcoming supply from IOI Central Boulevard Towers (1.25 million sq ft) in 2H2024 and Keppel South Central (600,000 sq ft) in 2025,” they write.
“More downsizing could occur as global layoffs among tech firms reach Singapore, which could affect office leasing momentum and sentiment. We expect high-single-digit positive rental reversions until IOI Central Boulevard Towers comes on board. After that, we expect office rents to decline in 2025 as supply outstrips demand and as vacancies increase,” they add.
Industrial REITs, on the other hand, are likely to see property demand affected by the slowdown in manufacturing and bleak economic outlook.
“However, industrial REITs benefit from the secular growth of new economy tenants such as tech, life sciences, biomedical, semiconductor, and electronics manufacturing, which typically locate themselves in high-spec, science and business parks and warehouses. Logistics in Singapore remains resilient, but we expect rental reversion to slow to mid-single-digit levels,” say the analysts.
Among the REITs, the analysts like CapitaLand Ascott Trust HMN (CLAS) and Cromwell European REIT as their top picks.
“We favour REITs with a healthy balance sheet, strong sponsors, and improving operating metrics, such as REITs in the hospitality and retail sub-sector. Catalysts are expected from a pick-up in the economy, asset recycling, and interest rate cuts,” they write.
PhillipCapital has an “accumulate” call and target price of $1.04 for CLAS and “buy” call and target price of EUR1.91 ($2.77) for Cromwell European REIT.
