Share prices of Singapore-REITs (S-REIT) have recently posted an around 7% rebound in November and December, having come off a retreat in global benchmark 10-year yields.
DBS Group Research is saying that therefore, it is time for investors to invest in S-REITs, or invest more.
In their Dec 14 report, analysts Derek Tan, Rachel Tan, Dale Lai and Gerladine Wong write that with yields peaked and “likely headed lower” in FY2024, they believe there is “more room to run” for yield-sensitive S-REITs.
This comes about following an “expected re-positioning” back from dividend-hungry investors, given the still-attractive valuations of 0.85x price-to-book value ratio (P/BV) and widening yield spreads of around 3.9%, above the 10-year mean of 3.3%.
During the period from 2HFY2022 to FY2023, interest rates have sharply risen, resulting in a correction in asset prices, with a varying degree of impact depending on geography and the asset type-mix.
The team of analysts reassure that the recapitalising of balance sheets via dilutive equity fund raisings are unlikely: “Investors are rightly concerned about the knock-on effects on gearing but our sensitivity analysis shows that around 90% of S-REITs are likely to be within the Monetary Authority of Singapore’s (MAS) lower gearing limit of around 45%, post-assumed cuts to book values.”
They continue: “We are comfortable that even at our assumed write-offs, S-REITs are still trading at an attractive price-to-book ratio (P/B) of 0.87x, close to its below one standard deviation (s.d.) levels. We read this positively and that the negatives are likely priced in at current valuations.”
Dimmed growth prospects, turning point to come in FY2024
Even with the assumption of high refinancing rates in the analysts’ estimates, the projected net property income (NPI) growth of around 4.4% compound annual growth rate (CAGR) over FY2024 to FY2025 will mean that distribution per unit (DPU) will post a growth of around 2.0% CAGR, with most subsectors showing a positive upside momentum.
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Amongst the subsectors, the analysts “remain convinced” that the hotel subsector “can continue” to lead on the back of robust revenue per available room (RevPAR) growth and contribution from completed refurbishments and acquisitions.
Sector picks
With interest rates still elevated compared to history ranges, the DBS analysts believe that “value” ranks higher than “safety” for S-REITs in the current cycle.
They continue, noting that re-allocations will feature more heavily into retail S-REITs like Frasers Centrepoint Trust J69U (FCT) and Lendlease Global Commercial REIT JYEU (LREIT), commercial S-REITS like Keppel REIT and Maple Pan Asia Commercial Trust (MPACT) and hospitality S-REITs such as Capitaland Ascott Trust (CLAS).
“We like industrial S-REITs, as valuations are less attractive on relative terms and will likely market perform. Despite this, we remain firmly vested in multi-year secular trends of logistics such as Fraser Logistics Commercial Trust (FLCT) and Mapletree Logistics Trust M44U (MLT) and data-centres like Digital Core REIT,” write the team at DBS.
Overall outlook
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With the Singapore economy projected to grow at an improved 2.2% in FY2024, following a tepid around 0.9% growth in FY2023, the team at DBS believes that Singapore’s real estate market is “likely to exhibit growth” and “remain” on an upward trajectory.
“With the property market remaining on an uptrend, we have projected rental reversions for most real estate sectors to stay positive. Based on our projections, S-REITs are projected to deliver a net operating income (NO) growth of around 4.4%, ranging from 1.2% to 8.0% over FY2024 to FY2025,” write the team.
The continued climb of interest rates should also eat into positive NPO growth exhibited by the various real estate sectors.
The team at DBS understand that with around 24% of debt expiring in FY2024, they expect up to an around 2.5% rise in overall interest costs due to the difference in base rates.
They write: “The erosion of DPU will still be apparent, especially in 1HFY2024, although easing rates conditions could soften the impact as we progress through the year.”
