Brokers' take: JPMorgan says industrial Reits 'most vulnerable' amid S-Reit headwinds

INVESTORS should brace for a correction ahead among Singapore real estate investment trusts (S-Reits), analysts at JPMorgan reckon, as they issued a non-consensus "underweight" on industrial Reits.

JPMorgan is expecting a "period of volatility" for S-Reits due to the recent steepening of the yield curve. Historically, a steeper yield curve has led to a 16 per cent correction in S-Reits. "Thus far, there has only been a 7 per cent pullback," the JPMorgan analysts said.

They added that industrial Reits are the "most vulnerable", as such Reits on average offer low yields and distribution per unit (DPU) growth compared to other sectors, and are likely to face headwinds as investors rotate into cyclical Reits.

Industrial Reits outperformed the S-Reit index by 9-42 per cent last year, on the back of structural growth exposures to e-commerce and data centres.

"However, with a cyclical upturn in 2021, the rationale to be vested is less compelling, given stronger growth and high yields offered by more cyclical Reits and many investors already being overweight on the industrial Reits," the analysts noted.

They are also cautious on Keppel DC Reit and Mapletree Industrial Trust as the data centre Reits' enterprise multiples (EV/Ebitda) are at a 10-15 per cent premium to their US peers, which may not be sustainable, said the JPMorgan analysts.

As such, they have downgraded Ascendas Reit, Keppel DC Reit, Mapletree Industrial Trust and Mapletree Logistics Trust to "underweight" from "overweight".

With choppy waters ahead, JPMorgan recommends sticking to reopening trades. "Despite headwinds from a faster-than-expected steepening yield curve, the strong two-year DPU growth of 11-37 per cent per annum should enable the retail/hospitality Reits to outperform," the analysts added.

Moreover, positive news flow such as progress on vaccine rollout, the phased return of workers boosting downtown malls, and progressive border reopening should also act as re-rating catalysts.

JPMorgan's top picks include CapitaLand Integrated Commercial Trust (CICT) with a target price of S$2.35. This is due to its "strong 18 per cent two-year DPU compound annual growth rate", as CICT is now past the peak of rental waivers, and should benefit from the completion of various office asset enhancement initiatives and lower borrowing cost, the analysts said.

They have also upgraded Mapletree Commercial Trust to "overweight" with a target price of S$2.25, as they believe that its strong balance sheet should allow the Reit to resume growth.

Meanwhile, JPMorgan has downgraded Frasers Centrepoint Trust to "neutral" on its more defensive suburban exposure.

Separately, office headwinds from work-from-home arrangements remain, which could cut demand and lead to a fall in rents, the analysts said. This should translate to office Reits continuing to trade below book value, they noted.

JPMorgan has retained its "underweight" ratings on Keppel Reit and Suntec Reit. As for Suntec Reit, its higher-than-average gearing of 44.3 per cent continues to be the key overhang, which the analysts believe would need to be managed via an asset sale, perp issuance or equity fundraising.