Broker's take: RHB says S-Reits rebound 38% from March, investor interest likely to remain high

SINGAPORE real estate investment trusts (S-Reits) have rebounded 38 per cent from March lows and are now trading closer to their long-term mean valuations, a research report by RHB on Tuesday said.

It maintained its "overweight" rating on the sector.

Investor interest is likely to remain high on the central bank's pledge to keep interest rates low, and signs of liquidity returning, analyst Vijay Natarajan wrote.

S-Reits rallied in the period from March to June, with retail clients emerging as net buyers and institutional investors as net sellers.

"We believe this is due to more account openings seen recently and limited savings options pushing retailers (retail buyers) to S-Reits," he added.

Mr Natarajan pointed out Monetary Authority of Singapore data that showed a record 10 per cent jump in Singapore dollar deposits and a 44 per cent jump in overseas resident deposits year on year.

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This was a "testimony to Singapore's growing safe haven status", he said.

The analyst added that S-Reits are taking advantage of the low-interest rate environment and liquidity to refinance entire loans maturing in 2020 at lower interest costs.

He predicted acquisitions will pick up pace in the second half of the year as financing and market conditions turn more favourable.

"Yield compression post recent rally has raised the possibility of acquisitions, with more opportunities now available in the market due to Covid-19," Mr Natarajan said.

Barring a second Covid-19 wave, S-Reits are also expected to distribute most of their retained income in the second half of the year.

For the second quarter, they are likely to "remain cautious amid fluid market conditions and retain a portion of distributable income, similar to Q1".

Q2 is expected to be a trough quarter for S-Reit earnings due to the impact of rental rebates and deferrals given to tenants during the "circuit-breaker" period.

The government this month passed a law requiring commercial landlords to provide two months of additional rental rebates to qualifying small and medium enterprise (SME) tenants. Meanwhile, industrial and office SME tenants will receive one-month rent rebates.

As most retail S-Reits had already set aside two months of rent rebates, the incremental impact of the law is "minimal", Mr Natarajan said.

SMEs account for under 15 per cent of the total portfolio of office Reits. They account for between 20 and 55 per cent of the total portfolio of industrial Reits, with tenants who qualify for the rebates still being assessed.

RHB said it continues to prefer industrial Reits for their resilience "due to limited telecommuting options, lower rental base, and lack of substitution choices".

This was followed by office and hospitality Reits. Retail Reits were the least preferred sector as the current crisis "has accelerated structural headwinds", Mr Natarajan said.

He added: "We recommend investors to continue to accumulate laggard plays with strong sponsor backing, quality assets and operational track record."

RHB's top picks in the S-Reit sector are: Suntec Reit, Manulife US Reit, ARA Logos Logistics Trust and IReit Global.

It issued "buy" calls for all four: Suntec Reit with a target price (TP) of S$1.78, Manulife US Reit with a US$0.90 TP, ARA Logos Logistics Trust with a S$0.64 TP, and IReit Global with a S$0.83 TP.