SINGAPORE (April 18): Maybank Kim Eng Research is initiating coverage on the Singapore REIT (S-REIT) sector with a “positive” view, highlighting the industrial sub-sector as investors’ best option for growth.
In a report on Tuesday, analyst Chua Su Tye observes sector-wide balance sheet improvement among S-REITs following the global financial crisis (GFC), noting their proactive efforts in lengthening out maturities as well as heightening fixed debt levels in anticipation of eventual rate hikes.
“We see sustained interest in the REITs, given their steady cashflow and DPU resilience in the absence of stronger assurance on Singapore’s growth outlook. Yield spreads are at the long-term average, suggesting that a potential recovery in sector fundamentals and inorganic growth upside are not factored into valuations,” says Chua.
In his view, industrial REITs are key structural beneficiaries of the Singapore government’s shift towards higher value-added business, which should bolster demand for hi-specs factories and business park space.
Larger REITs are better positioned given their larger asset portfolios, says Chua, in addition to firm sponsor backing to supplement visible right of first refusal (ROFR) project pipelines.
He adds that returns on capital for industrial REITs stand to be further enhanced by inorganic growth levers such as acquisitions and asset rejuvenation opportunities that facilitate the growth of distribution per unit (DPU).
Ascendas REIT (A-REIT) has therefore been identified as Maybank’s top “buy” pick within this sector at a target price of $2.85, for having the strongest fundamentals among its peers. According to Chua, the REIT is “best leveraged to the government’s pro-growth economic programmes” as its portfolio is geared towards business parks and hi-specs factories.
Mapletree Industrial Trust (MIT) and Viva Industrial Trust (VIT) have also been rated “buy” at target prices of $2 and 95 cents respectively.
While Chua believes MIT’s Singapore-focused industrial portfolio will see strongest DPU growth across the sector due to its diversified tenant base, ongoing redevelopment and asset enhancement initiative (AEI) projects, he also notes that VIT’s growth outlook is skewed towards its two large business park assets, on the back of positive rental reversion and post-AEI gains.
“We see the possible relevance of a consolidation theme given existing common shareholdings amongst the smaller REITs, with scale from asset under management (AUM) growth lowering borrowings costs and boosting DPUs,” concludes the analyst.
As at 10:45am, units of A-REIT, MIT and VIT are all trading flat at $2.52, $1.78 and 80 cents respectively.