Selldown across S-REITs

S-REITs saw a broad-based selldown last Thursday, alongside a rise in bond yields after Ben Bernanke’s statements. While an abrupt end to QE will impinge negatively on REITs, our strategists are expecting a more orderly rollback. We see room for bargain hunting.

We retain our Neutral call on Singapore property stocks but are now more positive on the sector compared to three months ago. We make no changes to our regional picks, with ASEAN being our preferred region (Malaysia, Thailand and Indonesia).

Selldown across REITs
SREITs saw a broad-based selldown last Thursday (23 May), alongside rising bond yields after Ben Bernanke’s statements left the market speculating that QE measures may be withdrawn earlier than expected. The sector now trades at a spread of 400bp, just a shade below the long-term average of 409bp, after both bond and REIT yields rose. 

An abrupt end to QE and sharp spike in bond yields would impinge negatively on REITs given their impact on spreads and refinancing costs. That said, our strategists/economists expect a more orderly rollback of QE closer to year-end, in conjunction with stronger US economic growth. They do not expect a one-off withdrawal or sharp withdrawal when the recovery remains fragile. 

At current spreads, we think that the expected marginal pick-up in yields from current low levels should leave SREITs attractive. The defensive nature of the sector will hold up well in a tactically cautious environment while debt maturity is fairly well-staggered to minimise the impact of any spike in interest costs on refinancing. 

Further out, improved economic growth (sparking any QE withdrawal) should feed into rental increases for REITs, particularly for those with shorter WALE.

Room for bargain hunting?
SREITs have climbed up 7% YTD and it is hard to tell if the selldown is over. That said, we see buying opportunities in AREIT (O/P), FCT (O/P), FCOT (O/P) and CREIT (O/P). Valuations for Suntec (Neutral), MCT (Neutral) and CMT (U/P) have turned more palatable after the selldown. 

Regional performances
Indian developers were the main laggards last week, with Unitech falling 16% and DLF down 15%. Regional REITs suffered from profit-taking after Bernanke’s statements, with benchmark REIT indices in both Singapore and Hong Kong down 4%. (Read Report)

Source : CIMB Research

Labels: , , , , ,