UOB Kay Hian analyst Jonathan Koh is maintaining his “overweight” rating on the Singapore REITs (S-REITs) sector after a spate of panic selling within the sector due to the financial turmoil in the UK.
The selling, which affected most S-REITs that have exposure to the UK and Europe, also spilt over to the broader S-REIT market.
Koh was referring to the fiscal policy blunder in the UK where chancellor Kwasi Kwarteng unveiled a GBP45 billion ($71.36 billion) mini budget on Sept 23, comprising unfunded cuts in corporate tax, income tax, stamp duty and national insurance.
The UK government also separately announced that it will be spending GBP150 billion to subsidise energy costs for businesses and consumers.
“The expansionary fiscal policy undermines Bank of England’s (BOE) efforts to tighten monetary policy. The violent sell-down in gilts caused margin calls and a liquidity crisis for pension funds, which triggered emergency intervention by BOE to purchase long-dated gilts,” Koh writes.
Kwarteng, several days later, made a tactical retreat and removed the dreaded cut in top rate for income tax from 45% to 40%. He will be bringing forward the announcement of his five-year plan to reduce government spending and lower public debt.
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CLAS, FCT, LREIT, MINT and MLT ‘top picks’
In his report dated Oct 10, Koh notes that the selling has brought valuations for the overall sector to “attractive levels” with bargains emerging.
Among the S-REITs, CapitaLand Ascott Trust (CLAS), CDL Hospitality Trusts (CDLHT), CapitaLand Ascendas REIT (CLAR) and Frasers Logistics & Commercial Trust (FLCT) have aggregate exposure to the UK/Europe, representing 17.9%, 18.2%, 10.0% and 39.0% of portfolio valuations, respectively, Koh notes.
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In addition, Lendlease Global Commercial REIT (LREIT) has a “small exposure” to Europe at 13.1% of its portfolio value. Suntec REIT has a small exposure to the UK with 11.5% of its portfolio value in the country.
Cromwell European REIT and IREIT Global focus entirely on the UK/Europe and are beneficiaries of potential recovery in Europe, the analyst adds.
Among the sector, Koh’s “bottom-up and diversified” picks are CLAS, Frasers Centrepoint Trust (FCT), LREIT, Mapletree Industrial Trust (MINT) and Mapletree Logistics Trust (MLT). He has “buy” calls for all five REITs with target prices of $1.27 (down from $1.29) and $2.56 for CLAS and FCT respectively, and target prices of 91 cents, $3.12 and $1.94 for LREIT, MINT and MLT respectively.
Koh has also lowered CLAS’s distribution per unit (DPU) estimate for the FY2023 to 6.2 cents.
Within the sub-sectors, Koh sees the hospitality, retail and office REITs as benefitting from the reopening of the economy. The limited new supply for office, logistics and retail segments in 2022 are also catalysts for these sub-sectors.
Units in CLAS, FCT, LREIT, MINT and MLT closed at 91 cents, $2.13, 71 cents, $2.31 and $1.49 respectively on Oct 13.
