REITs & Business Trusts - Increasing our risk free rate

Reviewing our assumption... 
We are reviewing our risk free rate assumptions since adopting a risk free rate of 2.7% for our DDM and FCF models since 2H14. For most of the past year, despite setting a risk free rate lower than the street, we were proven too conservative as the 10-year SG government bond yields have been trading at significantly lower levels.

… with higher rates expected 
Nevertheless, we will be increasing our risk free rate assumption from 2.7% to 3.1%. The 10-year SG government bond yield is already trading at 2.75% and the market expects a further 25bp increase in yield in 1 year (Fig 1). In addition to the selloff of European and US bonds which has pushed up long-term yields, the Fed is expected to raise the federal funds rate, as Yellen, Federal Reserve Chairwoman, signaled that a rate hike will be appropriate some time this year. We expect Singapore’s interest rates to take the lead from the US and trend up. We make no changes to the financing cost forecasts as we have already built interest cost escalations into our models.

Changes to valuation and rating
A higher assumed risk free rate results in a higher cost of equity and lower TP in our models, even as we keep other forecasts unchanged

As such, we downgrade Frasers Centrepoint Trust (FCT) from BUY to HOLD with a TP of S$2.03. We will keep a HOLD on OUE Hospitality Trust (OUEHT) with a TP of S$0.930, Asian Pay Television Trust (APTT) with a TP of S$0.820 and First Real Estate Investment Trust (FIRT) with a TP of S$1.390 . Meanwhile, we still favour Soilbuild REIT (SBREIT) with a TP of S$0.900 and Croesus Retail Trust (CRT) with a TP of S$1.030 as they still offer significant upsides of 15.0% and 20.1% respectively, including dividends. (Read Report)

Read Related Report
The Realty Singapore - S-REITs and 10-year bond yield go hand in hand
Wednesday, 10 June 2015
- Deustche Bank Markets Research

Source : KGI Fraser Research

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