‘Positive surprises’ in store for S-Reits’ H1 earnings as valuations lag fundamentals, say analysts

[SINGAPORE] The upcoming earnings season for Singapore-listed real estate investment trusts (S-Reits) could deliver “positive surprises”, particularly from the office and industrial sectors, said analysts.

This is despite S-Reits entering the first-half reporting cycle under a cloud of sluggish equity performance.

Year to date, the benchmark iEdge S-Reit Index has declined by about 4.6 per cent, contrasting sharply with the broader Straits Times Index, which has gained about 19.1 per cent.

Analysts attributed the poor performance to uncertainty over the interest rate outlook, and a shift in fund flows towards Singapore banks and artificial intelligence-related counters.

However, there is a “rising disconnect” between unit-price performance and underlying Reit fundamentals. This suggests that a bottom is near, RHB said.

Market observers are thus leaving the door open for positive earnings surprises during this reporting period, which begins in late July.

Most S-Reits will be reporting their H1 results. Frasers Property Reits will report their third-quarter results, and those sponsored by Mapletree will be reporting for the first quarter.

OUE Reit will be the first to release its results: on Wednesday (Jul 22). It will be followed by Mapletree Industrial Trust , Suntec Reit and Keppel DC Reit on Thursday.

Frasers Logistics & Commercial Trust and Mapletree Pan Asia Commercial Trust (MPACT) will release their results on Jul 30. CapitaLand Integrated Commercial Trust (CICT) will report its results on Aug 12.

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Consensus points to tepid but resilient growth

Market analysts generally expect S-Reits to post low-to-mid single-digit year-on-year growth in distribution per unit (DPU) for this reporting period.

While global macroeconomic friction has moderated expansion trajectories, brokerages generally anticipate marginal positive growth rather than a contraction.

OCBC Group Research lowered its DPU projections for S-Reits across its coverage by an average of 1 per cent for the current financial year, and by 1.4 per cent for the next financial year.

Still, OCBC expects “marginal growth for the current financial year”.

“Although operating trends have been largely healthy, downside risks remain, particularly on the borrowing costs front, as breakeven inflation rates have largely increased since the start of the Middle East conflict,” noted OCBC.

The RHB economics team remains “cautiously optimistic” over the macro horizon, forecasting that overall S-Reit DPUs under its coverage will recover by around 4 per cent this financial year, or 2.3 per cent when excluding volatile US office Reits.

“This is on the back of a combination of organic rental income growth, lower interest costs and inorganic growth from acquisitions,” said RHB.

DBS Group Research highlighted that Singapore-focused assets remain insulated from international rate shocks, pointing out that current Singapore Overnight Rate Average benchmarks are trading “substantially below the S-Reit sector’s average borrowing cost of above 3 per cent”.

The brokerage expects selected S-Reits, especially those with a larger proportion of Singapore-focused exposure, to still see savings at refinancing. This could boost their DPU as legacy borrowings mature.

Net property income margins are also protected by fixed-rate utility hedges.

“The majority of Singapore-centric S-Reits have hedged their utility costs with fixed hedges in place to shield from the recent spike in utility prices,” RHB noted.

“For overseas assets, utility costs are largely recoverable from tenants. Inflationary pressures from other operational costs – for example manpower, maintenance and security – remain manageable for now,” it added.

Nonetheless, downside risks persist, with the possibility of increasing borrowing costs for foreign currency-denominated debt, albeit partially mitigated by hedges in place.

Office and industrial sectors preferred

RHB believes that “upside surprises” are likely to come from office and industrial Reits due to better-than-expected rent growth.

Office trusts are at the top of RHB’s pecking order and a preferred sector of DBS. The industrial subsector is second on the pecking order, and is also a DBS preferred sector.

Hospitality trusts remain the least-favoured subsector among analysts, with brokerages maintaining a cautious stance. Analysts anticipate slight negative surprises, noting that performance has been checked by travel disruptions, elevated airfares and a softer consumer discretionary backdrop.

Brokerages recommend that investors maintain a defensive posture by accumulating large-cap platforms that exhibit strong balance sheet capacity and clear earnings visibility.

“Focus should be on S-Reits that have the ability of delivering sustainable and robust core DPU growth. We would also favour S-Reits that exhibit balance sheet resilience over simply higher yields,” OCBC said.

It added that its strongest geographical preference is on Singapore assets, given the Republic’s politically stable climate, defensive attributes and healthy local funding costs.

CICT stands out as a consensus pick across Citi, RHB and OCBC. Citi included MPACT and CapitaLand Ascendas Reit (Clar) in its top picks.

OCBC also highlighted Clar , Keppel DC Reit and CapitaLand India Trust . Meanwhile, RHB named Suntec Reit , Frasers Centrepoint Trust and Aims Apac Reit .