Recent SREIT sector outperformance is largely macro driven:
SREITs have outperformed the broad market index (FSSTI) (by c330bp) and the developer index (FSTREH) (by c229bp) since mid-September and are up c9% over this period. In our view, the sector move is largely driven by macro factors – in particular lower bond yields. Over the same period, the 10-year Singapore government bond yields have declined by c50bp from 2.9% to 2.4%. While spreads over the 10-year government bond yield have also come in, this has been more marginal at c10bp, resulting in a total yield compression of c60bp for the sector – this is reflected in the decline in sector dividend yields from 6.8% to 6.2% (corresponding to the c9% move in the index).
3Q2015 results suggest in line to better-than-expected performance:
The reported results for the larger SREITs for the past quarter (3Q2015) suggest better than expected performance for the retail sector and inline performance for the others. For retail, we note continued improvement in tenant sales and shopper traffic (now seen for some quarters), while for hotel sector, the pace of y/y deterioration in RevPAR slowed in 3Q (vs. 1H2015). Also, for AREIT’s business parks, reversions at 13.2% were stronger than the 8.3% reversion recorded in the previous quarter (portfolio-wide reversion of 9.1% vs. 6.6% in the previous quarter).
Macro factors still likely to dictate sector performance in the near-term:
In our view, bond yields and the direction of SGD exchange vs. major global currencies is likely to dictate the direction of the sector in the near-term as the growth outlook for the various sub-sectors is expected to remain tepid. We note that the sector dividend yield of 6.2% is higher than the historic average of 5.9% as is the spread over 10-year government bonds of c385bp (historic average: c360bp) providing the sector some buffer. (Read Report)
Read Related Report
1) The Realty Singapore - Consolidation in the works? GLP 2Q soft, Apple may leave CapitaGreen by Deutsche Bank Markets Research, published on 30 October 2015
Source : HSBC Global Research