SINGAPORE (Dec 4): OCBC Investment Research expects Singapore REITs (S-REITs) to record positive DPU growth next year.

For those under its coverage, OCBC is projecting growth of 0.3% for FY19F and 2.4% for FY20F.

In terms of sub-sector preference, OCBC prefers retail REITs, followed by industrial REITs, hospitality REITs and office REITs.

“Heading into 2019, we maintain ‘neutral’ on S-REITs, but with a bias to the upside,” says OCBC lead analyst Andy Wong Teck Ching in a Monday report.

While near-term supply pressures is forecast to be highest for retail, OCBC expects retail REITs under its coverage to remain resilient.

To recap, the recently concluded 3QCY18 results season saw 18 out of the 22 S-REITs under OCBC’s coverage report results which met expectations, while four fell short.

Average DPU growth was flat y-o-y, but an improvement compared to -0.8% y-o-y in 2QCY18 and -2.6% y-o-y in 1QCY18.

Wong says OCBC’s view is shared by the street, with Bloomberg consensus estimates pointing to DPU growth of 0.6%, 2.7% and 2.4% for FY19F, FY20F and FY21F, respectively.

From a balance sheet perspective, Wong says S-REITs under OCBC’s coverage have remained prudent when it comes to capital management.

As at Sept 30, the average gearing ratio stood at 35.1%, with 76.1% of their borrowings hedged or fixed.

Meanwhile, valuations for its S-REITs have become more reasonable though not really attractive, adds OCBC.

The forward yield spread between the FTSE ST REIT Index and the Singapore government 10-year bond yield last stood at 394 bps, three-tenths of a standard deviation below the five-year mean of 407 bps.

However, with increasing concerns and uncertainties over global economic expansion next year, Wong says quality defensive yield plays can help investors weather uncertainties ahead.

“Furthermore, we believe recent commentary by Fed officials has helped to assuage some worries about the pace of rate hikes ahead,” adds the analyst.

OCBC’s preferred picks are Mapletree North Asia Commercial Trust with $1.34 fair value, Keppel DC REIT with $1.48 fair value, Frasers Centrepoint Trust with $2.50 fair value and Frasers Logistics & Industrial Trust with $1.19 fair value.

Units in MNACT, Keppel DC REIT, FCT and FLT are trading at $1.13, $1.36, $2.17 and $1.06 respectively.