RHB Group Research analyst Vijay Natarajan is positive on Singapore REITs (S-REITs), despite the sector underperforming the STI so far this year.
“S-REITs are up 3% YTD vs the STI’s 10%, but we expect the recovery pace to pick up in 2H2021 – on a stronger economic rebound and positive shift in Singapore’s policy stance,” he affirms in a July 16 report.
Underpinning the sanguine outlook is an anticipated acceleration in economic recovery in the 2H2021, driven by vaccinations. With Singapore on track to meet its target to vaccinate two-thirs of the population by August 9, Natarajan anticipates further easing of Covid-19 measures that will be positive for REITs.
In addition, he points to recent comments by Ravin Menon, managing director of the Monetary Authority of Singapore, stating that risks for Singapore’s GDP to exceed the official forecast of 4-6% is are tilted towards the upside.
Natarajan views that the valuation gap between small, mid-cap REITs as well as large-cap REITs will continue to narrow in the near team. He notes that y-t-d, small, mid-cap REITs have, on average, outperformed +10%, compared to large-cap REITs’ +2%.
He foresees 2021 becoming a record year for REIT acquisitions, highlighting that the sector has seen $7 billion in acquisitions y-t-d. “With REITs’ expanding global mandate, the need for diversification, and ultra-low interest rates providing tailwinds, we expect the strong acquisition momentum to continue in 2H2021,” he says.
He also anticipates a pick-up in primary market activity in 2H2021, mainly driven by overseas REIT listings - four are currently in the pipeline.
Industrial REITs remain Natarajan’s preferred pick, given their earnings resilience, while hospitality REITs have priced in most of the optimism from vaccine rollouts. “Overall, we recommend investors hold on to a balanced portfolio of industrial REITs for stable yields, and mix of office and retail REITs to ride on near-term growth,” he explains.
His top picks are Suntec REIT, AIMS APAC REIT, and Prime US REIT. He has “buy” ratings on all three stocks with target prices of $1.76, $1.70 and US$1.03 respectively.
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He views that keys risks for the sectors include the reimposition of strict Covid-19 lockdown measures, and a faster-than expected rise in interest rates, which would potentially result in a surge in 10-year treasury yields.
As at 4.36pm, units in Suntec REIT, AIMS APAC REIT and Prime US REIT are trading at $1.51, $1.57, and 86 US cents respectively.
Photo: Bloomberg
