S-Reits tipped for further gains as rate hike fears subside

Singapore

AFTER a good run this year, S-Reits are likely to remain in vogue amid a more dovish Federal Reserve and room for further growth.

Analysts pointed to hospitality and industrial Reits among their preferred sectors on the back of easing supply, although some highlighted that valuations in general have tightened and investors might do well to accumulate on pullbacks.

"While investors could eye near-term profit taking, fundamentals remain sound," said Maybank Kim Eng analyst Chua Su Tye. "Delayed rate hikes and low interest rates suggest (S-Reits) will likely stay in favour as yields remain low." In addition, what hasn't materialised as yet is distribution per unit (DPU) recovery, he pointed out, adding that this will likely come through this year.

Credit Suisse projects 1-4 per cent DPU growth for S-Reits in the next two years on the back of improving demand-supply dynamics in the underlying property markets and/or from overseas acquisitions.

Meanwhile, DBS Group Research expects S-Reits prices to get a further boost, underpinned by interest rates staying lower for longer and hence, lower refinancing risk for S-Reits. In March, S-Reit prices already received a lift from "ultra dovish comments" at a point where the global economic outlook was growing increasingly hazy.

"With rate hikes behind us, coupled with a Fed pro-growth stance, we believe there is further momentum to bring S-Reits prices higher," DBS analysts Mervin Song, Derek Tan and Carmen Tay wrote in a research note last week. Acquisitions could also prove to be a catalyst, as a conducive cost of capital could lead Reits to seek accretive buys.

The team estimate S-Reits could return another 10 per cent before the year is out, flirting with levels last seen in May 2013.

This comes after the S-Reits sector has already outperformed the broader Singapore market, with the FTSE ST Reit Index chalking up year-to-date gains of 12.7 per cent, pointed out OCBC Investment Research senior investment analyst Andy Wong. In contrast, the Straits Times Index (STI) and the MSCI Singapore Index have seen returns of 8.3 per cent and 9.1 per cent for the same period.

Last year, while total returns for the FTSE ST Reit Index was negative to the tune of 3.7 per cent, the index still performed better than the STI and MSCI Singapore Index which returned -6.5 per cent and -7.6 per cent respectively.

Taking a broader snapshot over the past 12 years - which dates back before the 2008-09 global financial crisis - the FTSE ST Reit Index reported annualised returns of 5.1 per cent, versus 3.3 per cent and 3.2 per cent for the STI and the MSCI Singapore Index respectively.

"Reits have been very resilient and consistent in outperforming the broader Singapore market," Mr Wong said, highlighting the defensiveness of the sector. "In uncertain times, they are pretty defensive because of the leases that are locked in. In bull markets... underlying property asset values and underlying rentals of the Reits also benefit from the up cycle."

Across the sectors, OCBC is most bullish on retail, pointing to the quality of assets held by Singapore retail Reits as well as management strength and ongoing efforts to rejuvenate precincts such as Orchard Road.

While the growing popularity of e-commerce poses competition, this still accounts for under 10 per cent of total retail sales in Singapore, unlike in the US and China where the figure is in the double-digits.

Mr Wong also singled out the hospitality sector as another preferred sector for Reits, as the tapering in hotel supply this year and next year fosters growth in revenue per available room (RevPAR). Incoming hotel room supply is expected to edge up by a compound annual growth rate (CAGR) of just 1.5 per cent until 2021, easing significantly from a CAGR of 5.5 per cent from 2014-17.

Overall DPU growth is expected to be "relatively stable", clocking 1.9 per cent in FY19 and 2.4 per cent in FY20, vis-a-vis 1.2 per cent historically, going by the Bank of Singapore's forecasts for the 24 Reits it covers.

For now, Mr Wong remains neutral on S-Reits, citing stretched valuations. Instead, there are selective opportunities to accumulate on pullbacks, he said, singling out Keppel DC Reit, Ascott Residence Trust, Frasers Centrepoint Trust (FCT) and Mapletree North Asia Commercial Trust.

Maybank's Mr Chua remains selective on retail Reits, preferring Reits in the hospitality sector as RevPAR rebounds from a prolonged downcycle as well as Reits in the industrial sector, supported by overseas acquisitions. He also prefers Reits with sufficient debt headroom to allow for yield-accretive acquisitions.

One top buy for Maybank is Ascendas Reit. "We expect rising overseas exposure to offset lower Singapore contributions in the near term," he said. "We continue to favour its scale and see it as the best proxy for a recovering industrial sector, given its concentrated business park and high spec portfolio."

He added that the recently announced Draft Master Plan 2019 could also lend support to longer term DPUs, benefiting Mapletree Commercial Trust which could gain from tightening supply if older offices are converted into mixed use developments.

Kum Soek Ching, head of Southeast Asia research at Credit Suisse, suggested that investors look at adding to their positions upon price weakness. She said that at an average DPU yield of 5.6 per cent, S-Reits are trading at a yield spread of 3.54 per cent over the 10-year government bond, below the historical average of 3.7 per cent.

"With the compression in yields and an average price-to-book valuation of 1.05x, we could also see more equity raisings from the S-Reit sector. At these levels, we deem the sector as close to fairly valued, and see price weakness from prospective equity raisings as better opportunities to add to positions."

Meanwhile, the DBS analysts reckon that rotational interest will prevail for counters such as FCT, OUE Commercial Trust, Capitaland Retail China Trust, Mapletree Industrial Trust, Frasers Logistics & Industrial Trust, Mapletree North Asia Commercial Trust and Keppel-KBS US Reit since the larger cap stocks are trading at "relatively premium valuations".

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