SINGAPORE (Dec 19): RHB Research is maintaining “overweight” on Singapore REITs (S-REITs) on expectations of selective REITs to continue remaining in favour in 2018, following what the research house sees as a stellar performance in 2017.

In a Tuesday report, analyst Vijay Natarajan opines that S-REITs are likely to benefit from the current economic growth cycle and deliver distribution per unit (DPU) growth in the year ahead, with industrial and hospitality sectors expected to be the direct beneficiaries of the economic pick-up, further aided by supply tapering.

Hospitality, in particular, has been identified as a sub-sector that is ready for a rebound in 2018 with diminishing supply threats and demand expected to pick-up, leading RHB to expect hoteliers to gain some of the pricing power.

Overall, the research house expects revenue per available room (RevPAR) to increase by 3-7% in 2018, with OUE Hospitality Trust (OUE HT) as a top “buy” pick, with an 88 cent price target, as a direct beneficiary of this improvement.

Among the industrial subsectors, the analyst has a preference for REITs with exposure to the business parks and the high-tech industrial segment, with demand-supply dynamics for business parks to remain favourable coming on-stream in 2018.

Ascendas REIT (A-REIT) therefore remains his top “buy” pick with a target price of $2.90 due to its well-diversified industrial property exposure as well as its efficient capital recycling industry.

On the other hand, Cache Logistics Trusts (CLT), although rated “neutral” at a target price of 84 cents, has been identified by Natarajan as a late-cycle play on the turnaround in the logistics sector on expectations of supply headwinds abating in 2H18.

In spite of a positive office sector outlook, Natarajan believes Singapore’s office REITs under its coverage are expected to see continued negative rent reversions in 2018 as the expiring rents are still 10-20% above current market rents. As such, Natarajan remains “neutral” on this sub-sector and recommends investors to wait for a pullback.

However, he identifies Manulife US REIT as a good proxy US economic growth for its pure-play office exposure to the rebounding US economy and its office market – which, together with the potential strengthening of favourable USD movements, should help to mitigate the impact of a rate hike, in his view.

Manulife US REIT has been rated “buy” with a price target of 98 US cents.

Meanwhile, the analyst believes the outlook for retail, RHB’s least preferred sub-sector for S-REITs, remains challenging with overall demand and sentiments on the sector expected to remain weak.

He therefore expects only well-positioned defensive suburban malls to register decent performance over the year, and recommends Frasers Centrepoint Trust (FCT), rated “neutral” at a target price of $2.24, for investors looking for retail exposure due to the upside potential from recent asset enhancements, solid balance sheet, and potential growth from acquisitions.

As at 3:14pm, shares in OUE HT, A-REIT, CLT, Manulife US REIT and FCT are trading at 84 cents, $2.70, 84 cents, 92 US cents and $2.10 respectively.