REITs & Business Trusts Sector - Turning bullish after the Fed rate hike


Fed decision bodes well for the market...
On Thursday, the Federal Open Market Committee (FOMC) hiked the fed fund rates by 25bp, putting an end to the zero interest rate policy since Dec-2008. The US equity market took this positively, with the S&P 500 closing 1.45% higher on the day.

REITs oversold, rate hike concerns overblown
Since our June report ’What happens & what to do when interest rates rise’, the REIT index ‘FSTREI’ has fallen another ~12% despite the 10Y Singapore bond yield currently (2.50%) trading slightly below the June period (~2.65%). While we acknowledge that certain sub-sectors have seen decline in rents, such as office and hospitality, the selldown has been broad-based across various REITs.

Lower long-term interest rates bode well for REITs
Unsurprisingly, FOMC has, for some time, been shading down its 2016-2017 forecasts for fed fund rate target with the first rate hike delivered only last night. However, we note that the longer-term projections for fed fund rates has also been on the downtrend, with the average FOMC member now expecting normalized long-term rates at 3.3% (Dec-14: 3.8%).

Increased divergence between US/EU/HK REITs and Singapore REITs
Year on year, Singapore REITs (-8.1%) have underperformed REITs in the US (+1.8%), Europe (+22.3%) and Hong Kong (+1.1%), even after including dividends despite already offering high yields. If the comparison is done in USD, Singapore REITs underperformed more (-14.1%). Comparatively, SREITs look increasingly attractive versus overseas REITs.

Sector looking attractive after a steep decline
After a steep decline in stock prices with a more measured pace of expected rate increases, we think that the SREITs and Business Trusts under our coverage looks increasingly attractive. We like and reiterate our BUY rating on Croesus Retail Trust (TP: S$0.91), Soilbuild REIT (TP: S$0.87) and Frasers Centrepoint Trust (TP: S$2.03) for their stable cashflows and high dividend yield. We also like OUE Hospitality Trust (TP: S$0.83) as RevPAR has begun to stabilize. We upgrade Asian Pay Television Trust (TP: S$0.73) and First REIT (TP: S$1.25) from HOLD to BUY, as they have fallen below our TP. (Read Report)

Source : KGI Fraser Research

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