SINGAPORE (April 4): Maybank Kim Eng is remaining “positive” on the Singapore REIT (S-REITs) sector on expectations of continued outperformance, while highlighting Ascendas REIT (A-REIT) as the best proxy to overall recovery across S-REITs.  

The research house has adjusted its FY19-21 distribution per unit (DPU) estimates by between -2% and +4%. It is also raising its target prices by 2-9% after adjusting for interest rate assumptions, although operating estimates remain mostly unchanged ahead of S-REITs’ results reporting over the coming weeks.

Maybank’s top “buy” picks remain A-REIT, CDL Hospitality Trusts (CDL HT) and Frasers Centrepoint Trust (FCT) with the respective target prices of $3.10, $1.85 and $2.60.

In a report on Wednesday, analyst Chua Su Tye notes that these three REITs are trading at 5.7-6% FY19E dividend yield versus the sector’s 4.6%, adding that he believes they are set to deliver 4.2-7% DPU CAGR against the sector’s 2.7-5.2%.

“Following the Fed’s dovish statement in Mar 2019, MKE economists now expect no change to rates in 2019-2020 and have revised (down) ASEAN benchmark interest rate forecasts. Our positive view on S-REITs has worked out well, with delayed rate hikes and low interest rates suggesting that they will likely stay in favour as yields remain low,” notes Chua.

The analyst says he continues to prefer hospitality REITs as sector revenues per available room (RevPARs) recover from their longest-ever downcycle.

Specifically, he foresees 5-8% growth for FY2019-20, with hotels commanding stronger pricing power against contracting supply as new rooms slow to a 1.3% CAGR in 2018-21E, from 5.5% over the last four years.

While Chua expects recently-completed overseas acquisitions to mitigate an “uneven recovery” among industrial REITs, he says newer business parks and high-spec industrial properties remain bright spots for the sector against sharp office rent increases.

Remaining selective on retail REITs, he prefers FCT for its suburban mall footprint, and sees DPU growth levers for Mapletree Commercial Trust (MCT), which has a “hold” rating with a $1.80 target.

“We recommended a short-term pair trade of going long on A-REIT and short on CMT… In our view, A-REIT remains the best S-REIT proxy, with valuations supported by a DPU recovery from stronger business-park rents, rising overseas contributions and potential acquisitions,” says Chua.

Units in A-REIT, CDL HT, FCT and MCT last traded at $2.93, $1.66, $1.47 and $1.89, respectively, before the midday trading break.