UOB Kay Hian Research analyst Jonathan Koh sees “double happiness” in September, as simultaneous rate cuts expected in the US and the Eurozone represent positive catalysts for S-REITs.
The new era of lower interest rates has begun, writes Koh in a Sept 5 note. The governing council of the European Central Bank (ECB) will hold its monetary policy meeting on Sept 12, followed by the US Federal Reserve’s Federal Open Market Committee (FOMC) meeting on Sept 18.
The Fed has switched emphasis to supporting the labour market as “confidence has grown that inflation is on a sustainable path back to 2%”, says Koh. Fed Chairman Jerome Powell stated in his speech at Jackson Hole last month that “the upside risk to inflation has diminished but the downside risk to employment has increased”.
The US labour market has cooled considerably recently. The unemployment rate rose by 0.8 percentage points (ppts) y-o-y to 4.3% in July, although it is still low by historical standards. “Fortunately, the higher unemployment was caused by the increase in supply of workers and the slowdown in pace of hiring, rather than layoffs,” says Koh.
According to Koh, the Fed has ample room to respond to further weakening of the labour market, with the Fed Funds Rate at a 23-year high of 5.25%. According to San Francisco Fed President Mary Daly, it is “hard to imagine” not cutting interest rates in September.
Across the pond, Koh notes a steep fall in Eurozone inflation. Inflation within the Eurozone fell sharply to 2.2% y-o-y in August, compared to 2.6% y-o-y in July.
The lowest level of inflation over the past three years was driven by a drop in energy prices. Excluding the volatile prices of energy and food, core inflation was stable at 2.8% y-o-y.
According to Koh, the higher services inflation could be stimulated by the Paris Olympics, and may subside in the upcoming months.
The softer inflation coincided with signs of slowdown within the Eurozone. Eurozone GDP expanded by a sluggish 0.3% y-o-y in 2Q2024, hampered by heightened geopolitical tensions and fragile consumer confidence.
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Germany’s economy, the largest within the Eurozone, shrank 0.1% q-o-q in 2Q2024 due to contraction in private consumption and business investment. Germany’s net exports were also affected by weak demand from China, says Koh.
S-REIT picks
Koh has raised his target prices for S-REITs by an average of 5.5% after adjusting risk-free rate assumptions lower by 25 basis points (bps) from 3.00% to 2.75%.
For US-focused S-REITs, Koh lowered his risk-free rate by 25bp from 4.25% to 4.00%. “Our target prices for US REITs have similarly increased by an average of 3%.”
Koh says he picked a “diversified” basket of blue-chip S-REITs from a bottom-up basis. His top “buy” picks are: CapitaLand Ascott Trust HMN (CLAS), Frasers Logistics and Commercial Trust (FLCT) Keppel REIT (KREIT), Mapletree Industrial Trust ME8U (MINT) and Mapletree Pan Asia Commercial Trust N2IU (MPACT).
CapitaLand Ascott Trust
Koh’s target price for CLAS is $1.37.
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CLAS’s revenue per available unit (RevPAU) grew 4% y-o-y and 15% q-o-q to $155 in 2Q2024 (exceeding pre-pandemic levels by 2%), driven by higher room rates in Japan and the US.
Portfolio occupancy improved 4ppt q-o-q to 77%.
According to Koh, CLAS benefits from the catch-up in recovery in the Asia Pacific region, which accounted for 54% of its total assets.
CLAS benefits from growth in longer-stay accommodation, which accounted for 17% of its portfolio valuation. Gross profit for its eight student accommodation properties in the US grew 22% y-o-y in 1H2024. The properties registered rental growth of 5.5% y-o-y, while average occupancy was healthy at 93% for academic year 2023-2024. Its newly completed 678-bed Standard at Columbia in South Carolina received its first batch of students in August 2023 and is fully leased.
Frasers Logistics and Commercial Trust
Koh’s target price for FLCT is $1.48.
FLCT achieved positive rental reversion of 54.6% and 51.7% respectively for logistics properties in New South Wales and Victoria in Australia during 3QFY2024. It maintained 100% occupancy for logistics properties across Europe and the UK. Occupancy for Australia was 99%.
FLCT has low aggregate leverage of 33.2% as of June. It has a sizeable debt headroom of $793 million to support acquisitions based on aggregate leverage of 40%. Its interest coverage ratio remains healthy at 5.7 times, says Koh.
Keppel REIT
Koh’s target price for KREIT is $1.20.
KREIT is the only pure-play office REIT listed on the SGX. It achieved positive rental reversion of 9.3% in 1H2024. In Singapore, Ocean Financial Centre maintained full occupancy of 100%, while occupancy at One Raffles Quay and Marina Bay Financial Centre was stable at 99%.
For Australia, 8 Chifley Square in Sydney, Victoria Police Centre in Melbourne and David Malcolm Justice Centre in Perth maintained full occupancy.
In North Asia, KR Ginza II in Tokyo and T Tower in Seoul achieved 100% occupancy in 2Q2024.
Net property income (NPI) from North Asia increased 13.8% y-o-y in 1H2024.
KREIT’s valuation is attractive, says Koh, with 2025 distribution yield at 6.7% and P/NAV at 0.68 times, a 32% discount to net asset value (NAV) per share of $1.27.
Mapletree Industrial Trust
Koh’s target price for MINT is $2.93.
MINT has secured an established healthcare operator as a replacement tenant for its data centre at Brentwood, Tennessee. The new lease has a long duration of 30 years and provides rental escalation of 2% per year.
Occupancy for its data centre portfolio improved 1.5ppt q-o-q to 89.2% in 1QFY2025. MINT intends to acquire more data centres in Asia Pacific and Europe to increase geographical diversification.
MINT achieved positive rental reversion of 9.2% for Singapore in 1QFY2025. Koh says MINT provides growth from data centres at a “reasonable” price with FY2026 distribution yield of 5.6%.
Mapletree Pan Asia Commercial Trust
Finally, Koh’s target price for MPACT is $1.76.
NPI from VivoCity grew 4.6% y-o-y in 1QFY2025. VivoCity achieved a strong positive rental reversion of 19.9% and occupancy remains high at 99.8%.
VivoCity will undergo major revitalisation for basement 2. The asset enhancement initiative (AEI) will be executed in two key phases: to increase the number of grab and go food kiosks from 21 to 24, and to create a new retail area by converting 14,000 sq ft of car park space and reconfiguring the existing retail space.
The AEI is expected to complete by end-2025 and generate return on investment (ROI) of 10% on capex of $42 million.
MPACT completed the divestment of Mapletree Anson for $775 million, $10 million above the latest valuation on July 31. The exit NPI yield was low at 3.8%.
Aggregate leverage is expected to decrease from 40.5% to 37.6%. Management intends to recycle capital by exploring acquisition of retail properties in Singapore and further expansion in Japan.
According to Koh, MPACT trades at a FY2026 distribution yield of 6.5% and P/NAV of 0.76x, “which we deem attractive for a blue chip S-REIT”.
As at 2.46pm, units in CLAS are trading flat at 91 cents; units in FLCT are trading 2 cents higher, or 1.81% up, at $1.12; units in KREIT are trading 1.5 cents higher, or 1.71% up, at 89.5 cents; units in MINT are trading 3 cents higher, or 1.24% up, at $2.45; and units in MPACT are trading 4 cents higher, or 3.0% up, at $1.38.
