RHB Bank Singapore has kept its “overweight” call on Singapore REITs (S-REITs), and named CapitaLand Ascendas REIT A17U , Keppel REIT, Suntec REIT, AIMS APAC REIT as its top picks.
Analyst Vijay Natarajan says the recent turn of events arising from easing inflation leading to a favourable rate cut outlook have tilted the balance firmly in favour of S-REITs, which have been battered by high interest rates in the last few months.
While there will be a lag effect of about 12-18 months for positive impacts to flow through to bottom lines, Natarajan expects decisive shifts in investor sentiment and early positionings to ride the upcycle.
The analyst recaps the 2QFY2024 REITs results and outlook. He says that the majority of the REITs distribution per unit (DPUs) came in slightly below expectations mainly on higher financing expenses, but there were few positive surprises on stronger topline growth and better net property income margins.
Forward operational guidance remains upbeat for most of the sector, with post-rent reversions expected to continue in the mid-to-high single digits for Singapore’s industrial, office, and retail sectors, he notes.
Yet, one exception was the hospitality sector, where there was some caution on the revenue/available room (RevPAR) growth outlook, with a tightening of visitor spend amidst a stronger Singapore dollar and wearing off from last year’s (2H2023) high base effect, the analyst adds.
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Natarajan says that overall finance costs for most of the REITs are expected to increase by 5-30 basis points (bps) in 2H2024 as loans get refinanced, but most – overall – guided for costs to peak by 4Q2024.
“Valuations were largely stable for Singapore-centric assets, while positive surprises came from overseas markets, where valuations seem to have bottomed out and stabilised slightly earlier than our expectations – we might see a slight rebound as early as 4Q, with rate cuts now firmly in place,” he notes.
Meanwhile, the concerns over high gearing and debt refinancing have also largely abated, with valuations stabilising and refinancing secured for some of the more challenged US office REITs.
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Natarajan says that past cycles have shown sharp rallies during turning points in interest rates. “S-REITs’ performance has a high inverse correlation to risk-free rates, i.e. long term treasury yields, with particularly high sensitivity at turning points of the cycle,” he says.
The sector saw a 15%-40% rebound in 2012, 2016 and 4Q2023, when the market saw interest rates easing, the analyst notes.
S-REITs are currently trading at about 30% below 2021’s peak, and the analyst sees room for the recent rally to continue well into 4Q2024 and 2025. On valuation, the sector is trading at 0.9x P/BV (-1 standard deviation below mean) with a yield spread of about 335 bps, which is considerably higher than global peers, he continues.
“We recommend investors to adopt a slightly more aggressive stance, with a balanced mix of high-quality industrial REITs for stable yields, and office and selective overseas REITs to ride on the rebound from the turn in interest rate cycle,” says Natarajan.
For office REITs, the analyst remains positive in his long-term outlook for demand for Singapore office space, with economic growth expected to pick up in 2H2024. He names Keppel REIT and Suntec REIT as top picks.
On the other hand, Natarajan remains selective on retail REITs amid softening signs in retail sales and valuation grounds, and neutral on the hospitality sector. He names CapitaLand International Commercial Trust as the best proxy to retail-cum-office exposure, and Starhill Global REIT P40U as the best proxy to capture higher tourist spending-led growth.
In addition, he downgrades his call on hospitality REITs to “neutral” from “overweight”, and names CDL Hospitality Trusts J85 and Far East Hospitality Trust Q5T as beneficiaries, as they have low debt hedge positions of about 48% and about 36%.
Finally, the analyst says Cromwell European REIT and Elite UK REIT are his top picks for overseas REITs.
