As Singapore REITs (S-REITs) saw a solid close to 2023 with an accelerated return of some 9.1% in December 2023, up 15% from its lows at the end of October last year, DBS Group Research analysts Geraldine Wong and Derek Tan see that the sector will be net outperformers in 2024 as interest rates continue to subside.
“After the rebound in prices, S-REITs’ FY2024 yields have compressed to [around] 6.5%, implying a spread of [an estimated] 3.9% against the 10-year yields,” they write in their Jan 2 report.
In the near term, however, S-REITs are approaching “overbought” territory as seen in the combined 15% rise in the Singapore REITs index. The rise came about since the markets concluded that the US Federal Reserve was done with hiking interest rates.
The move mirrors the playbook that was seen in 2018 to 1H2019, which saw S-REIT and developers’ stocks rebounding by some 20% from their lows over a six-month period, note Wong and Tan. Given the strong rebound in prices, there may be some near-term profit taking, although there will be overall net allocation to S-REITs in 2024, they add.
In 2023, investors did well by buying into the industrial S-REIT subsector, but it’s now time to switch to the other subsectors for outperformance in 2024, say Wong and Tan.
This year, “value” will rank higher than “safety” in the current cycle. As such, Wong and Tan expect re-allocations to feature more heavily into retail S-REITs such as Frasers Centrepoint Trust J69U (FCT) and Lendlease Global Commercial REIT JYEU (LREIT), commercial S-REITs (Keppel REIT or KREIT and Mapletree Pan Asia Commercial Trust N2IU or MPACT), and hospitality S-REITs (CapitaLand Ascott Trust or CLAS) as these sectors trade close to -1 standard deviation (s.d.) in P/BV and yield terms. Among the subsectors, the analysts prefer retail, office, hotels and industrials in that order.
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“We still like industrial S-REITs, though 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 (Frasers Logistics & Commercial Trust or FLCT, MLT) and data centres (Digital Core REIT).
Overall, Wong and Tan believe that the S-REIT sector is “financially sound” and that the upcoming valuation exercises in January and April will validate their view that [around] 90% (or more) of S-REITs will see gearing remaining below the “market comfortable” level of 45%.
This implies that subsectors that are “hardest hit” on share prices – given the uncertainty to book values – will have more room to run in the coming months, they write.
