Brokers’ take: RHB upgrades Reit sector to ‘overweight’ as peak of rate cycle nears

RHB on Monday (Nov 20) upgraded its call on Singapore’s real estate investment trusts (Reits) to “overweight” from “neutral”, as it sees better days ahead for the sector.

“We are now turning more positive in our outlook as we near the peak of the rate cycle while valuations have become more attractive from the recent sharp correction, leading to good entry levels,” the research team said in a report.

It noted that negatives have been largely priced in at current levels, and news for the sector would likely turn “incrementally more positive” as it moves into 2024.

Its top picks were CapitaLand Ascendas Reit , which owns Galaxis at one-north, Keppel Reit , Aims Apac Reit and CDL Hospitality Trusts . RHB prefers Reits with high-quality sponsors, healthy balance sheets and gearing levels below 40 per cent.

It recommends that investors adopt a slightly more aggressive approach. They should have a mix of industrial Reits in their portfolio for stable yields, and office and hospitality Reits to ride on any recovery and rebound from the turn in the interest rate cycle.

For investors with higher risk appetites, selected mid-cap and overseas Singapore Reits will offer the most upside due to their “bombed-out” valuations.

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RHB expects Singapore Reits to continue their focus on divestments and lighten their balance sheets up until the first half of 2024, save for select acquisitions. It predicts asset valuations will stay largely stable across the different segments except for hospitality, which will have a slight upside.

However, overseas markets will likely continue to have negative valuations. RHB expects up to 10 per cent declines in valuations as a result of an expansion in cap rates, although this has been largely priced in.