Singapore Reits start the year well, 'likely to continue to shine'
DBS Group Research says fewer rate hikes by the Fed this year will set the scene for S-Reits to continue doing well
Singapore
REAL estate investment trusts (Reits) are doing well, as investors take cover behind yield plays.
Only a handful of the 36 Reits listed on the Singapore Exchange fell on Thursday, while the wider market continued to wallow in a red sea.
The Reits sub-index has risen almost 1 per cent since the start of the trading year on Wednesday. A year ago, it was down 9.3 per cent.
The Straits Times Index has wilted by 1.8 per cent in the two days of 2019 trading, and is down 13 per cent from a year ago.
The five Reits which fell on Thursday were Cache Logistics Trust, CapitaLand Commercial Trust, Frasers Logistics & Industrial Trust, Mapletree North Asia Commercial Trust and OUE Commercial Real Estate Investment Trust.
DBS Group Research said: "Macro uncertainties amid global trade tensions will likely weigh on investors' minds in 2019, resulting in their continuing to seek protection in yield plays like S-Reits."
In a Jan 2 report titled "Defensive the new offensive", it said a yield spread of 4.2 per cent (vs a 10-year average of 3.8 per cent) points to Singapore Reits or S-Reits being attractive to enter at current levels.
DBS economists recently predicted that the US Federal Reserve would raise interest rates twice this year, in line with consensus; this is a revision from the more hawkish reckoning that there would be four hikes.
A more dovish Fed will set the tone for S-Reits to perform well this year.
DBS Group Research said: "In this scenario, we believe that investors will continue to look for yield plays, which we believe will set the stage for the S-Reits to continue outperforming going into 2019."
S-Reits now trade at a forward FY19/20 yield of 6.2 per cent; distribution per unit (DPU) growth of 1.9 per cent is a pick-up year on year, on the back of projections of positive rental reversions, while recent acquisitions underpin a steady growth profile.
Last year was a record year, with S-Reits announcing or completing about S$10.5 billion worth of acquisitions; this was 61 per cent higher than in 2017, and will start to contribute positively from this year.
"The increase in acquisitions was largely in line, based on expectations of the lower cost of capital in 2018, with industrial Reits being the most active in growing asset under management. The Reits also raised S$4.3 billion, which is a 45 per cent year-on-year increase in secondary raisings (equity placements and rights issues)."
The impact of higher interest rates has been priced in, said DBS. A 1 per cent hike in base rates will "cut DPUs by only 1.1 to 1.2 per cent".
To combat the threat of rising interest rates, S-Reits have conservatively hedged a large proportion of their debt into fixed rates, estimated at about 75 per cent as at the end of last September.
"This level has been maintained by the S-Reits over the years. We note that the sector's average cost of debt was fairly stable at about 2.7 per cent between 2014 and 2018, despite the increase in base interest rates over the same period, which is largely due to a cut in credit spreads."
DBS Group Research added that despite expectations of higher borrowing costs, it believed S-Reits on average can still deliver DPU growth, which is projected to quicken from 1.9 per cent in 2019 to 2.3 per cent in 2020, it said.
This is largely due to the boost from acquisitions made last year, but more importantly, to the cyclical upturn in rents across the different property submarkets as supply pressures ease, offsetting headwinds from higher borrowing costs, it said.
"In terms of real estate sub-sectors, we are cautious that uncertainty from a slowing economy will result potential downside in 'expectations' in more cyclical sectors like the office, hotel and industrial (factory space) sub-sectors, where demand for space has historically been most closely corelated to Singapore's economic growth.
DBS Group Research said it prefers to stay vested in the more resilient retail and industrial (warehouse and business parks) sub-segments, given their domestic focus and fairly sticky demand respectively.
Its top picks are CapitaLand Mall Trust, Mapletree Commercial Trust, Mapletree Logistics Trust, Frasers Logistics & Industrial Trust and Mapletree North Asia Commercial Trust.
