SINGAPORE (Apr 16): Maybank Kim Eng is remaining “positive” on Singapore REITs (S-REITs), despite the recent pull-back in share prices against a rising interest rate regime.

In a Monday report, analyst Chua Su Tye says, “We see positive earnings momentum led by the large cap names from improving supply and demand, with near-term catalysts rising occupancies and stable/positive rental reversions.”

The analyst sees limited risks from higher interest rates given the sector’s well-cushioned balance sheets, with potential acquisition growth upside not priced in.

Valuations remain compelling, especially for <strong>Ascendas REIT</strong> (AREIT) and <strong>Mapletree Industrial Trust</strong> (MINT), given their headroom for accretive deals.

The research house has a “buy” recommendation on both the REITs with target prices of $3.05 for AREIT and $2.20 for MINT.

According to the analyst, S-REITs have been moving towards overseas diversification and the two REITs are best-placed to deliver on accretive deals, given their clear mandates and substantial debt headroom.

Meanwhile, right of first refusal (ROFR) pipeline assets could boost options against a backdrop of tighter cap rates.

“We also believe both divestment and redevelopment opportunities are being supported by the REITs’ longer land tenures - 50% of their assets exceed 40 years, a contrast to the 20-year tenures for new government land sale sites,” says Chua.

Investors are also likely awaiting completion of merger discussions between ESR-REIT and Viva, which could spur further consolidation activity amongst the small-cap names.

Overall in the S-REIT sector, leasing activity has jumped 35% y-o-y in the first two months of 2018, the strongest since 3Q13.

Hence, the analyst anticipates stronger leasing demand in tandem with improving manufacturing growth and a broader recovery in services.

However, industrial rents showed signs of bottoming out in 4Q17 at –0.1%, its slowest decline in 11 quarters. Chua expects this to stabilise in 2018 and forecasts 1-3% annual growth in 2018-2020.

“We see limited risks from rising rates given strong balance sheets, and valuations are supportive - AREIT’s yield-spread of 3.8% is above the SG 10-year government bond. However, this could lead to further rate tightening given a stronger rental recovery, as evident from earlier episodes,” says Chua.

As at 3.36pm, units in AREIT and MINT are trading at $2.67 and $2.04 respectively.

AREIT is currently trading at 1.1 times FY18 book, with a dividend yield of 6.2%; MINT is trading at 1.4 times FY18 book, with a dividend yield of 5.8%.

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