SINGAPORE (July 31): OCBC Investment Research is maintaining “neutral” on Singapore REITs (S-REITs) with a weaker outlook for the hospitality sub-sector, which has prompted a pushback in expectations for a pick-up in Singapore hotel RevPAR this year to early 2019.

In a Tuesday report, lead analyst Andy Wong says he finds hospitality REITs less attractive than before in terms of valuations, given the relatively muted DPU growth outlook for 2H18 as well as the rising interest rate environment.

The analyst generally recommends seeking more defensive shelter, specifically in trusts with strong balance sheets, long WALEs and exposure to more resilient sectors such as suburban retail.

Defensive names which investors may consider switching into include Frasers Centrepoint Trust (FCT), Frasers Logistics & Industrial Trust (FLT), which are both rated “buy” with fair values of $2.49 and $1.21, respectively.

In particular, Wong prefers FCT for its healthy aggregate leverage and DPU growth, which he believes has been buffered by its largest malls. He also likes FLT for its healthy WALE and diversified income streams after acquiring a portfolio of 21 assets from its key logistics markets, Germany and the Netherlands.

Further, the analyst highlights Mapletree North Asia Commercial Trust (MNACT) as another defensive REIT whose retail asset in Hong Kong, Festival Walk, has proven resilience over the years even during the last Global Financial Crisis (GFC). The trust has been rated “buy” with a fair value estimate of $1.42.

He also likes Keppel DC REIT (KDC REIT), rated “buy” with a fair value of $1.54, for its long WALE and ample debt headroom to fund inorganic growth ahead.  

Despite the lower expectations of hospitality REITs going forward, Wong favours Far East Hospitality Trust (FEHT) most within the hospitality sub-sector, as he believes it stands to benefit from the low base effect of poor FY17 operational results.

“Compared to its peers, FEHT posted a surprisingly strong 6.9% RevPAR increase on the back of better occupancy as well as higher ADRs,” he comments on the trust’s latest set of quarterly results.

FEHT has a “hold” rating and a fair value estimate of 67.5 cents.

As at 11.13am, units in FCT, FLT, MNACT, KDC REIT and FEHT are trading at $1.41, $1.05, $1.15, $1.38 and 68 cents, respectively.