Despite improving rent reversions and rise in service charges, Credit Suisse expects most Singapore REITs (S-REITs) to see slower or declining DPU in 2023.
In their unrated sector report, analysts Nicholas Teh and Louis Chua expect 8% to 10% reversions for office, -1% to 3% for retail and 2% to 3% for industrial S-REITs. However, revenue growth will be gradual and higher costs will come through faster, resulting in slower DPU growth.
“Acquisition growth should be lower given higher cost of capital, and we prefer REITs to divest/recycle capital. Reopening drives hospitality, while bottom-up drivers (such as asset enhancement initiative completions) support retail. We see slowest DPU growth for industrial/office,” they explain.
Remaining selective and preferring beneficiaries of reopening and capital recycling, as well as those with faster DPU growths, namely Mapletree Pan Asia Commercial Trust (MPACT), Ascott Residence Trust (ART) and CapitaLand Integrated Commercial Trust (CICT).
The analysts have upgraded MPACT to an “outperform” rating, having incorporated the merger with Mapletree North Asia Commercial Trust into their estimates. Their target prices for MPACT, ART and CICT stood at $2.05, 97 cents and $2.31 respectively.
Meanwhile, the analysts’ least preferred S-REITs are Mapletree Logistics Trust and Mapletree Industrial Trust, given a more challenging near-term DPU growth. They have also downgraded Frasers Logistics & Commercial Trust to a “neutral” rating, given foreign exchange pressures and slower recycling potential.
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Credit Suisse highlights that S-REITs have underperformed the Straits Times Index by 14% YTD and 20% since 2020. For 2023, dividend yields are about 6%, 1 standard deviation above the historical average for most.
In comparison, the highest yields the REITs have traded in the last ten years were 6.1%-6.6% for retail REITs, 7% for office REITs and 7%-8% for industrial and hospitality REITs, they note, adding that the historical comparison for the latter two may be less relevant given significant cycle and size changes.
Despite the underperformance, the sector yield spread has tightened to 2.5% compared to the historical average of 3.3%.
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“We believe the strong Singapore dollar and resilient asset values allow the REITs to be seen as long-term inflation hedges, which results in the tight negative correlation between inflation expectations and yield spread — hence, high inflation supports a tight yield spread.
“If we were to use 2.5% (similar to current levels) as a fair yield spread and assume the Singapore bond yield peaks at 4%-4.5%, this implies peak yields of 6.5%-7%,” they add.