Small-cap S-Reits to benefit from global real estate index inclusion: Citi

LENDLEASE Global Commercial Reit (Lendlease Reit) and Ascendas India Trust (a-iTrust) have been named Citi Research's top small-cap Singapore real estate investment trust (S-Reit) picks following FTSE Russell's latest ground rule update on the FTSE EPRA Nareit Global Real Estate Index Series.

Citi has given Lendlease Reit and a-iTrust target prices of S$0.93 and S$1.82, respectively.

The ground rule update, which took effect from June 24, 2021, includes a lower investable market cap threshold of 0.1 per cent for additions to the Developed Asia series, compared to 0.3 per cent previously. For deletions from the index series, the threshold has been lowered to 0.05 per cent from 0.15 per cent.

In a Monday report, analyst Brandon Lee estimated that these changes to align with other developed markets will facilitate nine small-cap S-Reits including Lendlease Reit to be potentially considered for the index series.

Inclusion on the index would help these S-Reits to improve liquidity, investor visibility and potential investability, as well as lower the cost of equity and make it easier for distribution per unit-accretive acquisitions via partial equity raising, he said.

In Mr Lee's view, both updates suggest that non-constituent securities with an investable market capitalisation equal to, or greater than the above-mentioned basis points of their respective regional index, will be eligible for index inclusion or deletion.

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"We note that the index series are adjusted for free-float and foreign ownership limits, while each security is tested for liquidity (over 12 months) semi-annually in March and September," said the analyst.

While no specific free-float market capitalisation threshold was given on index inclusion, he estimated that the threshold for previous S-Reit inclusions averaged US$1.2-1.4 billion, meaning that a third of the existing 0.3 per cent threshold would translate to roughly US$400 million to US$500 million.

Citi's S$0.93 target price for Lendlease Reit was based on the assumptions of a risk-free rate of 1.95 per cent; an overall cost of equity of 7.9 per cent; and a terminal growth of 2.9 per cent. The Reit's properties have been valued at a weighted average cap rate of 4.4 per cent.

Meanwhile, the S$1.93 target price for a-iTrust is derived from the average of a S$2.14 dividend discount model (DDM) based valuation as well as a re-apprised net asset value (RNAV) valuation of S$1.50.

Mr Lee believes a-iTrust will provide a 12-month yield of 6 per cent, although the Reit is not on the Citi's list of nine small-cap S-Reits to be eligible for potential inclusion in the FTSE EPRA Nareit Global Real Estate Index Series.

Aside from Lendlease Reit, other small-cap S-Reits which Citi thinks could be included are Cromwell European Reit, ESR-Reit, AIMS Apac Reit, ARA Logos Logistics Trust, SPH Reit, OUE Commercial Reit, Keppel Pacific Oak US Reit and Starhill Global Reit.