'Limited' risk of big price correction for S-Reits

Singapore

THE risk of Singapore real estate investment trusts (S-Reits) facing major price corrections in the coming year is limited as long as global borrowing rates stay low, Credit Suisse said at an investment outlook for 2020 on Monday.

Strategists at the Swiss wealth manager noted unit prices for S-Reits remain supported even though the near-term upside could be more constrained after the asset class' 20 per cent rally this year and with yields of 10-year Singapore government bonds close to historical lows.

That said, Credit Suisse is of the view S-Reits with strong acquisition pipelines and those with opportunities to recycle and enchance their assets are likely to outperform.

As it stands, the local Reit market has been undergoing consolidation in the last year and a half.

On Monday, Frasers Logistics & Industrial Trust (FLT) and Frasers Commercial Trust (FCOT) joined the line of merger candidates after the respective managers of the property trusts proposed a S$1.58 billion deal.

This might be undertaken through a trust scheme of arrangement, with FLT acquiring all units of FCOT for S$1.54 billion.

If the deal goes through, the combined entity's portfolio of S$5.7 billion in assets is expected to be a top 10 S-Reit by market capitalisation.

In October, Ascott Residence Trust unitholders approved a merger with and Ascendas Hospitality Trust. With S$7.6 billion in assets, it will be the eighth largest hospitality trust globally and Asia-Pacific's biggest.

A month before that, OUE Commercial Reit and OUE Hospitality Trust successfully merged with a total portfolio value of S$6.9 billion.

While the low interest rate environment could to keep prices for S-Reits stable but their yields capped, the lower borrowing costs are likely to limit upside for Singapore's three banks, Credit Suisse said.

In 2020, Singapore equities are expected to perform in line with regional markets due to a muted growth environment, which Credit Suisse wrote, "continues to cap upside for the market despite their favourable valuation".

Credit Suisse has forecasted the Singapore market to register earnings growth of 3.5 per cent in the coming 12 months.

With an average dividend yield of 4.4 per cent, Singapore stocks are expected to be in demand despite modest economic growth estimates.

Investors looking for income generating assets will see the city-state's listings finding favour among those chasing yield, which provides downside support.

While concerns over growth as well as trade tensions between the US and China likely to remain, Ray Farris, Credit Suisse's chief investment officer for South Asia believes both the global economy and markets are likely to continue to show resilience.

Credit Suisse forecasts that the global economy will grow by 2.5 per cent in 2020.

It also expects growth of the Singapore economy to rebound to around 1.7 per cent - but that's provided US-China trade tensions ease.

READ MORE: Frasers' logistics and commercial Reits propose S$1.58b merger