Brokers’ take: DBS expects S-Reits to navigate rate hikes, currency headwinds well

SINGAPORE-LISTED real estate investment trusts (S-Reits) have ample defences against sustained interest rate hikes until late 2023, DBS Group Research said on Thursday (Dec 15).

This comes as the research team expects Singapore’s economy to slow in 2023, resulting in more cautious business consumer sentiment.

“We believe Singapore’s real estate cycle will enter a more modest growth phase, but we still project most sectors to see market rents remaining on an uptrend in 2023,” said analysts Derek Tan and Dale Lai.

Their top picks are suburban retail Reits such as Frasers Centrepoint Trust , Lendlease Global Commercial Reit and CapitaLand Integrated Commercial Trust ; as well as industrial plays including CapitaLand Ascendas Reit , Frasers Logistics & Commercial Trust and CapitaLand India Trust .

These Reits offer better distribution per unit (DPU) resiliency with the potential for surprise upside, DBS said.

Although the research team is expecting an overall net property income growth of about 5 per cent from FY2022 to FY2024, it projected a flatter DPU growth rate of 3 per cent.

Excluding hospitality S-Reits, DPU growth is estimated to drop 0.5 per cent, as higher refinancing rates and foreign exchange losses weigh on certain S-Reits. That being said, S-Reits, on a whole, will still have sufficient leeway due to their high fixed-rate debt ratios.

Currency risks are also well-mitigated for most S-Reits, as their managers have entered into forward hedges to smooth currency impact.

The most negatively impacted by currency risks is Daiwa House Logistics Trust , DBS noted. It said the 16 per cent depreciation in the yen against the Singapore dollar will weigh on FY2023 DPU, although the Reit’s manager has hedged most of the income at a rate higher than current spot prices.

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Meanwhile, Reits such as CapitaLand India Trust have negative exposure to the rupee, and pure-play China-focused S-Reits may get hit by the year-to-date depreciation of yuan to the Singapore dollar, the research team said.

“We see a more conducive environment for S-Reits as the Federal Reserve potentially slows and ends its hikes by the first quarter of 2023,” it added.