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Analysts maintain 'overweight' on S-REITs as sector remains a 'stable yield investment'

Felicia Tan
Felicia Tan • 5 min read
Analysts maintain 'overweight' on S-REITs as sector remains a 'stable yield investment'
Analysts are overall positive on Singapore REITs (S-REITs) following the worldwide fiscal and monetary stimulus from central banks, lowered interest rates, as well as the extended Jobs Support Scheme (JSS) unveiled on August 17.
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Analysts are overall positive on Singapore REITs (S-REITs) following the worldwide fiscal and monetary stimulus from central banks, lowered interest rates, as well as the extended Jobs Support Scheme (JSS) unveiled on August 17.

The JSS will now provide 10% to 50% in wage subsidies for up to seven months from August depending on the project recovery of the different sectors.

For the hospitality and retail sectors – two of the harder-hit ones from the Covid-19 pandemic – local employees will receive wage support of 50% and 30% respectively, from 75% and 50% previously.

The government has also set up some $320 million in tourism credits to drive local spending to eateries, shops, hotels, and tourist attractions in Singapore.

As at August 24, the FTSE S-REIT Index was down 7.1% year-to-date (y-t-d), outperforming the Straits Times Index (STI) which registered a 18.9% decline y-t-d.

Strongest gains month-on-month were from the industrial subsector (+3.1%) and weakest performance at the hospitality subsector (-6.9%), says PhillipCapital research analyst Natalie Ong in an August 24 report.

On that, Ong has maintained her “overweight” call on the sector as she sees REITs as a “stable yield investment”.

Ong believes that S-REITs may emerge stronger with more future-ready portfolios, and a re-rating of the sector due to the acceptance of higher gearing levels, which will benefit REITs. The accelerated phasing in of future trends such as digitalisation will create more opportunities for landlords.

Ong also sees REITs as a tried and tested investment, as it remains an attractive yield play. Priced at lower levels, the yield for S-REITs spread at the -0.6 standard deviation (SD) level, and recovery in prices and low interest rates present a “conducive environment for acquisition,” she says.

“We like the commercial and industrial sub-sectors due to tapering office supply after the surge in supply in the prior two to three years, and the asset enhancement initiative (AEI) and redevelopment opportunities for the Industrial sector. The tenants in these two sectors are also less affected by the COVID-19 outbreak,” Ong adds.

“We are cautious on the hospitality and retail sub-sector due softer tourism sentiment and retail outlook, exacerbated by lingering fears of another wave of Covid-19 outbreak,” she says.

The research team at OCBC Investment Research has also maintained its “overweight” recommendation on the sector due to relatively undemanding valuations.

“We believe the worst is over after a difficult 1H20… though we remain cognizant on the uncertainties ahead,” they write in a August 24 report.

Expecting that the Fed will keep rates at near zero for up to the next five years, the team feels the “lower for longer” interest rate environment will continue to drive demand for good quality yield instruments for selective S-REITs.

“This hunt for yield theme has already resulted in the yield compression of the S-REITs sector. On an absolute basis, the FTSE Straits Time REIT Index (FSTREI) is currently trading at a blended forward distribution yield of 5.5%, which is 1.4 s.d. below its 10-year mean (6.2%),” it says.

However, the team warns that a low-interest-rate environment means there may be excessive risk-taking by corporates, although the Monetary Authority of Singapore (MAS) has imposed a regulatory gearing limit of 50% on S-REITs.

It also expects S-REITs to manage their capital prudently following the “lessons learnt” from the last Global Financial Crisis (GFC) in 2009.

“S-REITs currently have an aggregate leverage ratio of 36.7%, which not only provides a healthy buffer to the regulatory limit, but there is also ample debt headroom to pursue inorganic growth opportunities,” it says.

In 1H20, S-REITs reported a cumulative 27.8% dip y-o-y in their distributions per unit (DPU), with all major sub-sectors recording negative growth.

The hospitality, retail, office, and industrial sub-sectors fell 61.8% y-o-y, 45.1% y-o-y, 20% y-o-y, and 13.5% y-o-y respectively.

Of the REITs, only datacentres reported positive growth.

“Our revised projections for the current financial year (FY20/21F depending on financial year end) now point to a 10.1% decline in DPU on a market cap weighted basis. However, we expect to see a recovery by 15.4% in the next financial year (FY21/22F), in-line with expectations of an economic rebound,” says the team.

“We generally believe investors can view the glass as half full for the S-REITs sector over the medium-to-long-term horizon, but recognise the fact that there is still a myriad of near-term uncertainties as businesses and individuals adapt to the new norm and it would also take some effort and good luck for the water to reach the brim again,” it adds.

Top picks for the OCBC Research Investment team are Frasers Logistics & Commercial Trust (FLCT), Manulife US REIT (MUST), Mapletree North Asia Commercial Trust (MNACT), CapitaLand Mall Trust (CMT), and ESR-REIT with “buy” calls for all.

The team has priced each REIT with fair values of $1.59, 84 US cents, $1.09, $2.29, and 45 cents respectively.

PhillipCapital’s Ong has given “buy” calls on Ascott Residence Trust (ART), CMT, MUST, and Prime US REIT with target prices of $1.08, $2.33, 90 US cents, and 94 US cents respectively.

As at 4.30pm, units in ART are trading at 88.5 cents, CMT at $1.92, ESR-REIT at 38.5 cents, FLCT at $1.34, MNACT at 93.5 cents, MUST at 74.5 US cents, and Prime US REIT at 79 US cents.

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