Worst could be over for S-Reits even as analysts slash target prices

ANALYSTS have slashed their target prices for Singapore-listed real estate investment trusts (S-Reits) on higher-than-expected interest costs and foreign exchange woes. But a rebound in S-Reit prices in November has sparked hopes that the worst may be over.

Following the results for the quarter ended September, DBS Group Research cut distribution per unit (DPU) forecasts for FY2023 and FY2024 by 7 per cent as it revisited its estimates for the S-Reits.

“Based on our revised estimates, the S-Reits are now forecast to deliver a FY22-24 DPU growth of 2 per cent,” DBS analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong said in a recent report.

Excluding the hospitality sector, which is projected to deliver a two-year compound annual growth rate in DPU of 16 per cent through to FY2024, the rest of the S-Reits are expected to see DPU contract by 0.2 per cent annually.

“The results season was an opportunity for us to revisit our estimates for the S-Reits, given the more-than-expected rise in base rates in 2022,” the DBS analysts said.

In addition, S-Reits with foreign-based assets – especially those with majority exposure to the euro, Japanese yen and British pound – received downward revisions in estimates as the analysts updated their foreign currency assumptions to spot rates.

Target prices were also lowered by an average of 11 per cent on the slower growth assumptions.

Manulife US Reit saw the biggest cut in target price to US$0.48, down 31 per cent from US$0.70 previously.

Prices of the US office Reit, which at its third-quarter results briefing announced it is undertaking a strategic review, has fallen 44 per cent in the year to date.

In comparison, the iEdge S-Reit Index is down 16.5 per cent in the year to date, while the Straits Times Index is up 4.7 per cent.

Other research houses have also lowered their target prices on Manulife US Reit, while maintaining their “buy” calls.

RHB cut its target price by 18 per cent to US$0.64, while CGS-CIMB trimmed its target price by 12 per cent to US$0.69.

Fellow US office landlord Prime US Reit also suffered the brunt of the target price cuts, with DBS lowering its target price by 26 per cent to US$0.65, from US$0.88 previously.

RHB also cut its target price for Prime US Reit by 23 per cent to US$0.77, from US$1 previously.

“The counter has been oversold along with its peers and is trading close to distressed levels... amid an overly bearish outlook for the US office sub-sector,” said RHB analyst Vijay Natarajan.

Units of Prime US Reit have fallen 44 per cent in the year to date.

Another S-Reit with a big drop in its target price is UK-focused Elite Commercial Reit , whose target price was lowered by 24 per cent to £0.53, from £0.70 previously.

Units of Elite Commercial Reit are trading 25 per cent lower year-to-date.

Elite Commercial Reit was also the only S-Reit to be downgraded by DBS to “hold”, from “buy” previously.

“While Elite Commercial Reit’s fundamentals remain intact, the higher cost of debt will weigh on DPU going forward,” the research house said in a report following the Reit’s third-quarter operational update.

Other S-Reits that have had their target prices slashed by more than 20 per cent by DBS include Daiwa House Logistics Trust , Digital Core Reit , EC World Reit and ARA US Hospitality Trust .

With lower-than-expected US inflation data for October fuelling a rise in S-Reit prices over the past month, however, analysts believe it could mark a possible turn in fortunes for the sector.

“US Federal Reserve chair Jeremy Powell has given clear hints of a slowdown in future rate hikes as early as December 2022,” DBS analysts said in a separate report on Dec 2.

“We believe that the slowdown and eventual pause in hikes would support the share prices for S-Reits in the first half of 2023.”

The way the analysts see it, another key catalyst could come from the softening of China’s stance on its strict zero-Covid policy.

“There is no doubt that it will be an overall positive for investor sentiment and also have positive implications on the currently disrupted supply chains and potential consumer spending,” the analysts said, noting that some sub-sectors that are poised to benefit include industrial, manufacturing, and China-focused retail plays.

“The ‘holy grail’ will come from the eventual resumption of outbound travel of China tourists, which will be a further boost to the hospitality sector in the medium term,” they added.