Brokers’ take: Analysts most positive on commercial Reits amid interest-rate volatility
Vivienne Tay
ANALYSTS remain positive on commercial real estate investment trusts (Reits) in Singapore and Malaysia. This is amid expectations that interest-rate volatility will persist in the near term, even as the Federal Reserve slows its rate hikes.
RHB on Friday downgraded Singapore-listed Reits (S-Reits) to “neutral” from “overweight” as it expects rising interest-rate volatility to continue in the near term.
From an operational standpoint, S-Reits will remain resilient, RHB said. It expects a modest cap rate expansion of between five and 25 basis points and does not foresee any large drops in asset value.
That being said, the research team projects distribution per unit growth to plateau, due to rising borrowing costs.
“Despite a reasonably well-hedged profile for S-Reits before entering into the rate upcycle in 2022, the sector was not spared from the sharp increase in interest rates impacting the unhedged portion of debt, as well as refinanced and new loans secured last year,” said RHB analyst Vijay Natarajan.
Echoing the sentiment, DBS Group Research expects S-Reits to keep facing higher financing costs as near-term base rates remain elevated at the 4 per cent level. This will continue before a gradual decline in 2024 – when the Fed is expected to stop raising interest rates and lower them in the second half of 2024.
Refinancing costs could rise between 2.5 and 3 per cent in 2023 to 2024 due to the difference in base rates, assuming a three-year refinancing profile, DBS noted.
S-Reits with higher gearing and a lower proportion of debt hedged to fixed rates will be more exposed to higher interest rates, DBS said. At present, US office and Europe-focused Reits have the highest gearing levels, which coincides with declining asset values in both markets.
Among S-Reits, RHB prefers industrial Reits and those with strong balance sheets and sponsor support. Its top picks are CapitaLand Ascendas Reit , Aims Apac Reit and Keppel Reit .
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DBS also recommended that investors stay invested in logistics, retail and hospitality sectors for their earnings stability.
UOB Kay Hian (UOBKH), meanwhile, maintained its “market weight” recommendation when it comes to Malaysian Reits. It believes the sector offers a neutral level of risk-to-reward returns given current interest rate and inflation headwinds.
Malaysia Reits outperformed the FTSE Bursa Malaysia KLCI index by 8.9 per cent and remained resilient in the year to date.
Its top pick is Axis Reit, which is the only “buy” recommendation among the Reits under its coverage. UOBKH noted that the Reit offers decent yields of at least 6 per cent from 2023, with potential upsides from future acquisitions.
On a long-term basis, UOBKH said it prefers the retail segment, particularly prime or niche malls, due to business resilience.
An uptick in international tourist arrivals will benefit the retail and hospitality segments, with better rental-reversion prospects for the retail sector. Meanwhile, industrial Reits continue to thrive.
The research team views the short to medium-term interest rates and inflation headwinds as “manageable”, given Malaysian Reits’ healthy gearing levels, which stand at 37 per cent on average – well below the threshold of 50 per cent.
Most of the debt taken on by Malaysian Reits is based on fixed financing rates, UOBKH said in a report.
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