Singapore REITs - Take the leap of faith

Shared By Stock Fanatic on Tuesday, February 20, 2018 | 20.2.18

■ Correction on interest rate fears largely done; stronger property fundamentals

■ Attractive valuations with yield spreads and P/Bk now close to historical averages ahead of multi-year upturn

■ Office and hotels remain our preferred sectors

■ Top picks – AREIT, CCT, MLT, Suntec, CDREIT, FCT and FCOT

It's different this time. The spike in the 10-year bond and fears over inflation caused the S-REIT index to drop by c.7% over the past week and we believe that the recent sell-off is largely done. While the sharp correction brings back painful memories of the close to 22% drop in S-REIT prices back in 2013, we believe that this time, it's different. This is mainly coming on the back of stronger property fundamentals for most subsectors (office, hotels, industrials) supporting higher rentals/RevPAR, driving higher distribution growth rate. The increased income visibility and upside to earnings will, in our view, translate into tighter yield spreads going forward. Moreover, the quantum of interest rate increase (c.40-bp increase in 10-year bond till 2019) is much lower than the 90-bp increase we saw from the lows back in 2013.

Buy into firmer fundamentals. Given our expectations of a return growth on the back of better economic growth and easing supply pressures, as discussed in our 2018 outlook report, we believe the normalised yield spread (yield less normalised Singapore 10-year bond yield of 2.7%) can compress from 3.3% currently to c.3%. Post the correction, spot yield spreads and P/Bk of 3.7% and 1.07x which are close to historical mean of 3.8% and 1.04x, are attractive as in a multi-year upcycle the P/Bk can increase up to +1SD of 1.24x which typically coincides with an increase in interest rates. We believe once investors refocus on the improving property fundamentals, a re-rating will occur. Thus, the current weakness is a buying opportunity.

Seleced Office, hotels and industrial REITs to leverage on upswing. With the outlook for office rents and hotel room rates remaining bright as confirmed by recent guidance post the recent results season, we remain overweight on the office and hospitality REITs with our top office picks being CCT (TP S$2.10), Suntec (TP S$2.30) and FCOT (TP S$1.71). Within the hotel space, we like CDREIT (TP S$2.00) and FHT (TP S$0.89). We also advocate investors being overweight on AREIT (TP S$2.85) and MLT (TP S$1.45) as they are consistent performers that are also leveraged to the cyclical upturn. Furthermore, we like FCT (TP S$2.48) for its strong DPU growth.(Read Report)

Source : DBS Group Research

Posted on Tuesday, February 20, 2018 | 20.2.18
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