Singapore REITs Sector - Yielding to higher rates


Potential rate hike
The Singapore REITs (SREITs) have been relatively volatile YTD due to the movement in the ten-year Singapore government bond yield and changing expectations on the US rates. During the Fed taper in 2013, they underperformed the market by 9.2%/9.6% in the three-/nine-month period after the announcement. Additionally, during interest rate spikes in the past, SREITs have been the clear underperformers. We do not expect the trend to change this time around. CS's base case is for the US to start raising rates in September 2015 with the ten-year treasuries hitting 2.80% (+48 bp) at end- 2016. Additionally, CS economists expect the three-month SIBOR to reach 2.0% by end-2016 which will raise the borrowing cost for REITs.

A triple whammy for office REITS
(1) We see the strongest headwinds for the office sector with 4.6 mn sq ft of space entering the market in 2016/17E. Historically, net demand has averaged 1 mn sq ft p.a., which implies that occupancies could drop to 86.7% (-2.2 pp). 

(2) Higher borrowing costs would impact office REITs the most, particularly KREIT and Suntec, with a 100 bp rise in interest rates lowering DPU by 3.2-4.1%. 

(3) Office asset NPI yields provide the lease buffer to expanding cap rates. Top Underperform: Suntec REIT, which could see further 19% downside if rates rise by 50 bp.

Retail environment most benign
Retail REITs are likely to benefit from retail consolidation as tenants move to better-performing malls that are close to transport hubs (e.g., Plaza Singapura, Westgate, Causeway Point, Northpoint). We believe suburban malls will also provide more resilience in the weak overall retail environment. Top pick: CT, the least exposed to higher borrowing costs and suburban mall exposure.

Summary of material changes
We cut DPS estimates for Suntec, CCT and KREIT to factor in lower occupancies, leading to 6-12% cuts to our TPs. We also lower our TP for MCT and upgrade CT to OUTPERFORM (from Neutral). (Read Report)

Read Related Reports
SG - Weekly S-REITs Tracker (22 Jun 2015)‏
Monday, 22 June 2015
- OCBC Investment Research
The REITs Pulsebeat: Weekly Review Report
Monday, 22 June 2015
- RHB Research

Source : Credit Suisse Asia Pacific Equity Research

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