Buy S-REITs on dips as valuations remain stretched, advises OCBC

Buy S-REITs on dips as valuations remain stretched, advises OCBC

By: 
Michelle Zhu
23/08/17, 09:18 am

SINGAPORE (Aug 22): OCBC Investment Research is maintaining “neutral” on Singapore REITs (S-REITs) after all 24 REITs under its coverage reported 2Q17 results that came in line with its expectations, with overall distribution per unit (DPU) growth coming in flat.

In a Tuesday report, lead analyst Andy Wong highlights OUE Hospitality Trust (OUE HT) as one that experienced “stellar” DPU growth over the quarter, and hence has chosen the REIT to replace CapitaLand Mall Trust (CMT) as one of the research house’s top selections with a “buy” rating at 82 cents’ fair value.

Frasers Centrepoint Trust (FCT), Frasers Logistics & Industrial Trust (FLT) and Keppel DC REIT remain among his top “buy” picks at fair value estimates of $2.28, $1.22 and $1.39 respectively.

Meanwhile, Wong notes that positive overall sector DPU growth over the quarter, which was largely driven by the data centre, industrial and healthcare REITs, was offset by hospitality, office and retail REITs.  

One trend which the analyst has noticed is that REIT managers continue to be proactive in unlocking value for their unitholders, such as through the capital recycling of activities undertaking.

He also believes operating metrics appear to have shown some positive signs in the S-REIT space over the quarter, such as the apparent bottoming out of office rents.

“From the retail front, there has been some improvement in shopper traffic and tenant sales, while RevPAR for the hospitality players have shown a smaller decline in Singapore and there was actually positive growth in overseas markets such as China, Malaysia and Japan in local currency terms for most of the hospitality REITs,” comments Wong.

Noting firm cap compression rates over the quarter, Wong says the continued low neutral level of the US Fed funds rate would imply further compression in S-REIT yields in the near-term.

“Coupled with ample liquidity in the markets and continued tight bond yield spreads, we believe further compression in S-REIT yields remains a possibility in the near-term, but recommend investors to buy on dips as valuations remain stretched,” concludes the analyst.

As at 9:18am, units in OUE HT, FCT, FLT and Keppel DC REIT are trading at 76 cents, $2.11, $1.07 and $1.29 respectively. 

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