Brokers' take: DBS positive on S-Reits, says interest rate risk is mispriced

DBS Group Research on Monday (Feb 14) said investors should start to accumulate on Singapore-listed real estate investment trusts (S-Reits) on the back of strengthening fundamental data points noted in recent results and meetings.

The research team is positive on S-Reits and believes the impact on interest rates is more muted than what the markets are currently pricing in and expecting.

Recent share price weakness in S-Reit has widened the sector's yield spread to about 4.2 per cent - 1 standard deviation lower than its 10-year mean, DBS said in a report.

"While refinancing rates are likely to be higher going forward, we believe that the impact is manageable and not as large as investors fear," said analysts Derek Tan and Dale Lai.

The analysts see "ample defences" put up by the S-Reits. This includes the Reits hedging 70 per cent of their interest costs in fixed rates, further minimising the impact of higher rates on distributions.

DBS estimates that a 50 basis points (bps) and 100 bps rate hike would only cut FY2022 distributions by 1.8 per cent and 3.5 per cent respectively, implying a maximum cut of 20 bps in headline yields of about 6 per cent. Moreover, a hike of 100 bps in interest costs would take more than 3 years for a Reit to feel the full impact on distributions.

Keeping in view stronger economic growth accompanying higher interest rates, the research team continues to prefer S-Reits with "stronger" distributions per unit (DPU) profiles. It sees strong domestic retail sales driving a 5-6 per cent rise in DPUs for retail and selected commercial S-Reits.

DBS prefers Frasers Centrepoint Trust, Lendlease Global Commercial Reit, Suntec Real Estate Investment Trust, CapitaLand Integrated Commercial Trust and CapitaLand China Trust, it said in a report.

It also likes Ascott Residence Trust for its larger domestic exposure and pivot to the student accommodation sector, as well as industrial S-Reits like Frasers Logistics & Industrial Trust and Mapletree Industrial Trust for their acquisition visibility.