Singapore REIT Sector - Moving closer to a rate hike


The REITs have continued to weaken in the recent weeks, while an improvement in US' employment data raised the perception that the fed could raise rates in September. As such, we revisit our REIT sensitivities to rising rates.

(1) Current yield spreads imply that CDLHT, CCT, KREIT and CMT are pricing in the highest risk of a rate hike, while ART and SUN are pricing in the least. (2) Stress testing our DDM assumptions implied the biggest downside for SUN at -13%. (3) KREIT and SUN are the most sensitive to rising borrowing costs, while OUEHT, CMT and MINT are the most immune.

We believe that it is too early to bottom fish the office REITs despite their YTD underperformance as valuations could stay low, given that incoming offices have just starting pre-leasing and there could be more downside to earnings estimates.

We believe that the retail sector is the most benign and have a preference for suburban retail REITs with OUTPERFORM ratings on CMT and FCT. Amongst industrial REITs, we prefer KDC REIT and MINT.

Moving closer to a rate hike
The REITs have continued to weaken in the recent weeks, while an improvement in US' employment data has raised the perception that the fed could raise rates in September. As such, we revisit our REIT sensitivities to rising rates.

CS-S-REITS
Most REITs are trading above historical yield spreads

With the recent sell down, the REITs have started to price in more in terms of higher rates and a majority of REITs are trading above their historical yield spreads. The current yield spreads imply that CDLHT, CCT, KREIT and CMT are pricing in the highest risk of a rate hike, while ART and SUN continue to price in the least.

Raising cost of equity by 50 bp
Our current DDM assumptions (3% risk free rate and equity risk premium of 6.0% (mostly)) imply cost of equity (COE) of between 7.1– 8.5% for the REITs under our coverage. Stress testing these by raising our COE by 50 bp implied the biggest downside for office REITs, in particular for SUN at -13%. The downside on CCT and KREIT is less pronounced at -3% and -6%, respectively.

Sensitivity to borrowing costs
Most REITs have a majority of their borrowing costs in fixed debt, largely shielding them from fluctuating rates. Based on the current capital structures, we estimate that KREIT and SUN are the most sensitive to rising interest costs, while OUEHT, CMT and MINT are the least sensitive.

Time to bottom fish office REITs?
Office REITs have been the clearest underperformers YTD, down 13– 21% (but on the back of CCT and SUN surging 21% and 28% in 2014) as concerns on the 2016/2017 oversupply nears. We acknowledge that many of the risks have been priced in, particularly for KREIT and CCT; however, we believe that valuations could stay low given that uncertainties are still high with incoming offices just starting pre-leasing activity, while there could be more downside to earnings estimates. Over the past 12 months, 2016 DPU estimates for CCT have been raised 1.1%, while Suntec has been lowered 5.5% (given the disappointment in retail rents) and KREIT has been lowered 6.7%.

Retail most benign, followed by industrial
We believe that the retail sector is the most benign and have a preference for suburban retail REITs with OUTPERFORM ratings on CMT and FCT. Amongst industrial REITs, we prefer KDC REIT (long wale and acquisition growth) and MINT (completion of BTS projects). (Read Report)

Source : Credit Suisse Asia Pacific Equity Research

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