SINGAPORE (Mar 12): OCBC Investment Research is maintaining “neutral” on the Singapore REIT (S-REIT) sector with a preference for retail and hospitality REITs over their office counterparts for their comparatively conservative asset valuations.

This is because the research house believes optimism on further rental growth for office REITs in 2019 has likely been priced in and is set to moderate from the 14.9% growth in 2019, and thus has “more room for disappointment than an outperformance”.

In a Tuesday report, analyst Andy Wong says he foresees retail REITs receiving a slight boost from consumption and retail spending from Budget 2019, with the one-off $1.1 billion bicentennial bonus that grants up to $300 in government service tax (GST) voucher cash.

Citing CBRE projections for 2019, he believes a strong supply inflow is not expected to be a major concern as an “encouraging amount” of emerging retail space has been taken up at high pre-commitment rates.

“Beyond 2019, the pipeline of new retail space will drop considerably to 135.5k and 98.0k sq ft in 2020 and 2021, respectively. This compares very favourably to the historical five-year annual average of 1.66m sq ft from 2014 to 2018. We expect tightening vacancy in the medium term due to incoming supply scarcity,” says the analyst.

Frasers Centerpoint Trust (FCT) is Wong’s top “buy” pick in the Singapore retail REIT space with a fair value estimate of $2.50, especially for its recent move to acquire a 17.1% interest in PGIM Real Estate AsiaRetail Fund.

This comes as Wong believes the transaction will complement FCT’s existing portfolio of suburban malls, and expects it to be DPU accretive.

Ranking second on Wong’s sector list are the hospitality REITs, as the analyst believes they paint a “more sanguine outlook ahead” due to recent hotel transactions and the Government Land Sales (GLS) of the hotel site at Club Street, which has led him to believe the asset valuation of hospitality REITs are conservative.

Within the hospitality REIT space, Ascott Residence Trust (ART) is Wong’s top “buy” pick for its strong set of 4Q18 results, highly geographically diversified portfolio of high-quality assets, and defensive positioning. The trust has been given a fair value estimate of $1.25.

“Post the divestment of Ascott Raffles Place at an attractive exit yield of ~2%, ART’s gearing is expected to drop to ~32%. This would translate into a debt headroom of close to S$1b, and offers ART greater flexibility to pursue DPU accretive acquisitions,” comments Wong.

Lastly, Wong highlights Keppel DC REIT (KDC REIT) as a preferred “buy” pick among S-REITs with a fair value estimate of $2.50 as he projects FY19F DPU growth to come in at a market-cap weighted 1.9% for the S-REITs under OCBC’s coverage, driven largely by KDC REIT and office REITs.

This is expected to continue in FY20F, he adds, with projected DPU growth of 2.4% on the back of growth from the industrial and hospitality REITs, as well as KDC REIT once again.

While the analyst believes S-REIT valuations “leave nothing to be excited about” at current levels, he remains constructive on the near-term trading performance of the sector, underpinned by continued benign expectations of the rate hike trajectory by the Federal Reserve (Fed) in 2019.

“Based on the Fed funds futures rate, the market is pricing in no rates hikes by end 2019… hould the Fed choose to raise rates at least once this year (given the still tight labour market), this may cause markets to relook at their assumptions and result in capital outflows from yield sensitive instruments such as REITs,” cautions Wong.

Units in FCT, ART and KDC REIT closed at $2.26, $1.16 and $1.45, respectively, on Tuesday.