With the cut-off yield on Singapore’s latest round of six-month Treasury bills (T-bills) down 21 basis points (bps) to 3.13% on Aug 29, Bank of Singapore (BOS) senior equity research analyst Andy Wong says investors should “segue” into Singapore-listed REITs (S-REITs) in their hunt for yield.
Speaking at BOS’s S-REITs outlook event on Aug 29, titled “A Turning Point”, Wong says investors should be prepared to reposition their portfolios, as yields from T-bills will fall in tandem with rate cut expectations for the US Federal Reserve. “There’s definitely reinvestment risk surrounding some of these short-tenor instruments as well,” says Wong to clients and investors at the SGX Auditorium.
Here, he calls attention to the FTSE ST All-Share Real Estate Investment Trusts Index (FSTREI), which has underperformed the broader Singapore market since the start of 2020.
However, Wong says the sector has “reached a turning point” on the back of upcoming Fed rate cuts and expectations of a soft landing scenario.
He cites an S-REIT report that was first shared by OCBC Investment Research on Aug 23, the same day Fed chair Jerome Powell delivered a dovish speech, saying “the time has come for policy to adjust”. Many have interpreted this to mean a quarter-point cut will come in September at the next Fed meeting.
See also: S-REITs at ‘long-awaited turning point’, says OCBC Investment Research
Now, the FSTREI’s current 12-month forward distribution yield of 6.1% is in-line with its 10-year average of 6.2%, says Wong, citing data as of Aug 21.
Sector valuations are “still supportive” from a price-to-book (P/B) and distribution yield standpoint, he adds, with “attractive” forward P/B multiple of 0.9 times, or 1 standard deviation below its 10-year mean of 0.98 times.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
The risks of further asset revaluation losses, which has plagued many S-REITs in recent years, is likely priced in, says Wong.
“As S-REITs are seen as a hybrid between equities and bonds, we tend to look at yield spreads, which is the distribution yield that you get above the risk-free rate,” notes Wong. The FSTREI is trading at a forward distribution yield spread of 340bps above the 10-year Singapore government bond yield.
“Given where spreads are today, we believe stock selection is key,” says Wong. “Our order of preference for the major [S-REIT] sub-sectors are logistics and industrial, hospitality, retail and office.”
That said, a “well-diversified” S-REIT portfolio “should still include selective opportunities in our less-preferred sub-sectors”, says Wong.
Top picks
To find these gems, Wong advises investors to be “particularly attentive” to the asset quality of the REIT’s entire portfolio, as well as the manager’s track record and approach to capital management.
For more stories about where money flows, click here for Capital Section
Wong vaguely says he prefers S-REITs that are “trading at undemanding valuations” and “backed by strong sponsors”. These select names also have “healthy financial positions”, and “ideally, some Singapore asset exposure”.
According to BOS’s Aug 27 report, these overall top picks are: Frasers Logistics & Commercial Trust BUOU (FLCT), CapitaLand Ascott Trust HMN (CLAS), Mapletree Industrial Trust ME8U (MINT), CapitaLand Ascendas REIT A17U (CLAR) and Parkway Life REIT.
Among these names, FLCT has the highest potential upside, with Wong’s target price of $1.35 25% higher than the REIT’s Aug 29 close price of $1.08.
CLAS has a potential upside of 19.3%, with a $1.08 target price against its 90.5 cents close; while Parkway Life REIT has a 16.6% potential upside, with a $4.29 target price above its $3.68 close.
MINT and CLAR have the lowest potential upside among these top picks, with target prices representing 12% ($2.71) and 13% ($3.23) gain respectively.
On the other hand, Wong’s least-preferred picks are Suntec REIT and Keppel DC REIT, both of which are trading above his fair value estimates. Suntec REIT closed at $1.23 on Aug 29, above Wong’s $1.15 fair value; while Keppel DC REIT closed at $2.13, above Wong’s $1.97 fair value.
Charts: Bank of Singapore
