SINGAPORE (Apr 12): Expect a pick-up in office and hotel S-REITs, while the retail and industrial logistics segments should see a slowdown, says UOB in its REITs' results preview.
With the Fed signalling two more rate hikes in 2018, S-REITs could face higher financing costs in the near term although UOB expects pickup in growth to offset the impact of higher financing cost.
In addition, REITs are also more insulated against rate hikes with a higher proportion of their financing in fixed-rate and longer-term maturity instruments.
In its Thursday report, analyst Vikrant Pandey says S-REITs under its coverage will emerge more resilient compared to the last cycle during the global financial crisis.
In 4Q17, S-REITs had 55-89% of their total debt locked in on a fixed-rate basis and an average debt maturity of 3.3 years versus 2.1 years in 4Q08.
Pandey is bullish on the hospitality sector given signs of good market absorption of 4Q17 supply with new luxury hotels sticking to their pricings and Average Daily Rates (ADRs) holding firm.
Looking ahead, the supply pipeline remains muted this year amid a surge in travellers from India and China and returning corporate demand led by the IT, pharmaceutical, aviation precision manufacturing and government sectors.
These will drive occupancies towards 90% in 2020, and tilt pricing power back to hotel operators by 3-5% in 2018-20, says the analyst.
"We already see occupancies picked up in the Singapore portfolios of CDREIT (+1.3%) in FY17 and FHT (+0.8%) in 1QFY18, which could continue rising amid tighter demand-supply dynamics," says Pandey.
As a result, UOB is maintaining its "overweight" in the Singapore REIT sector and prefers CDL Hospitality Trusts, CapitaLand Commercial Trust and Ascendas REIT with target prices of $1.95, $2.09 and $3.05 respectively with forward yields of 5.7%, 4.9% and 6.2% respectively.
As at 3.07pm, units in CDLHT, CCT and AREIT are trading at $1.73, $1.84 and $2.70.
