SINGAPORE (Mar 19): DBS Group Research is remaining upbeat on Singapore REITs (S-REITs) given investors are looking for re-entry opportunities with the recent correction in unit prices.
The research house says with lower prices, yields have inched up by between 0.5bps and 6.0bps with upside surprise coming from an expected rebound in rental growth rates.
The strength of the SGD versus regional currencies is also another reason, says lead analyst Derek Tan in a Monday report.
“Investors should be less worried about the impact of rising rates on distributions given that on average, S-REITs have hedged 80% of their interest costs into fixed rates, and diversified funding sources which results in having no concentration of debt expiry in a single year. These result in fairly modest smaller than 3% reduction in distributions if interest costs rise by 1%,” he explains.
Following an investor conference in Korea and Japan which saw the attendance of a group of S-REIT managers, Tan says the general sentiment among them is turning more positive on the back of stronger macro-economic datapoints.
Declining supply risk for a number of sub-sectors, namely office, hotel and industrial, are also setting the stage for a gradual rebound in organic growth for the overall S-REIT sector, he adds.
Tan also observes the ambitions of managers to grow inorganically with S-REITs like Mapletree Industrial Trust (MINT) expanding their mandates to include new geographies.
DBS also has a "buy" on Ascendas REIT (A-REIT) with $2.85 target given its stable financial metrics and potential for a gradual recovery in portfolio performance with the expected bottoming out of the industrial sector.
“Among the industrial sub-segments, we remain most optimistic on the business park sub-segment where a combination of increasing tenant relocation amid limited supply situation is expected to drive rentals higher in 2018-2019,” says Tan.
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DBS also has a "buy" for CapitaLand Retail China Trust (CRCT) with a $1.80 price target given its portfolio has strong property attributes and healthy tenant sales. With adequate debt headroom and the signal of a shift in focus to more actively-managed assets, Tan thinks more acquisitions are on the manager’s radar in the near-term.
Keppel DC REIT (KDC REIT) and Keppel REIT have also been rated “buy” with the respective price targets of $1.60 and $1.41.
Tan expects Keppel DC REIT's acquisition momentum to continue in 2018 with “bright prospects” given the robust outlook for data centres globally.
On the other hand, the expected recovery in office rents should act as a catalyst to close the discount to Keppel REIT’s estimated book value of $1.40.
On the retail front, Starhill Global REIT (SG REIT) also gets a “buy” with a price target of 82 cents, as an alternative play to the improving tourism outlook and given its prime portfolio in Asia Pacific, ongoing asset enhancement initiatives (AEIs), and well-distributed debt expiry profile with no major refinancing until 2021 onwards.
“The projected rebound in tourist arrivals from 2018 will be a driver for higher tourist spending, a catalyst for stronger operational performance going forward. The lack of competitive supply in Orchard Road will support the REIT’s rental negotiations,” says Tan on SG REIT’s outlook.
Last but not least, Cromwell European REIT (CERT) – rated “buy” at a price target of 0.63 euros – is favoured for its diversified Pan-European portfolio and predominantly freehold or ongoing leasehold properties, which Tan finds to compare favourably with other S-REITs which predominantly hold properties with up to 99-year leaseholds.
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“CERT provides investors exposure to the continued economic recovery in Europe. In addition, unemployment rates are expected to fall further with household consumption, while investment and industrial production activities are expected to increase going forward,” notes Tan.
As at 2.39pm, units in A-REIT, CRCT, KDC REIT, Keppel REIT, SG REIT and CERT are trading at $2.67, $1.58, $1.41, $1.22, 72 cents and 0.58 euros (94 cents) respectively.
