PhillipCapital analyst Natalie Ong has maintained her “overweight” outlook on Singapore REITs (S-REITs) amid catalysts expected from the pick-up in the Singapore economy.

According to the report dated April 12, all sub-sectors are in the green with the exception of healthcare at -0.1%. Office REITs are the biggest gainers at +8.5%.

As Singapore’s economy starts its recovery trend, Ong foresees that rental relief requests will taper off.

“S-REITs are expected to resume positive DPU growth, with all sectors except hospitality recovering to pre-pandemic DPU levels,” she says.


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The REITs under PhillipCapital's coverage are expected to deliver FY2021 DPU yields of 3.6% to 8.8%, she adds.

On this, Ong says she prefers the retail and industrial sub-sectors, with her top picks being Manulife US REIT (MUST) and Ascendas REIT (A-REIT). PhillipCapital has rated MUST and A-REIT at “buy” with target prices of 84 US cents ($1.13) and $3.64 respectively.

In her sector round-up, retail REITs are unlikely to be impacted by the standardisation of contract terms in the Fair Tenancy Framework introduced on March 26. Central malls are also likely to see a boost in numbers from returning office crowds on April 5.

“That said, weaker leasing demand and lower rents may persist for some time as tenants rationalise costs. Dominant central and suburban malls which are located near transport nodes are likely to be prioritised when retailers consolidate stores,” she says.

DBS Group Holdings, on April 9, announced that it will be giving up two and a half floors of its current space in Tower 3 of the Marina Bay Financial Centre (MBFC) in December, three years earlier than the expiry of its 12-year lease for 700,000 sq ft on 22 floors signed in December 2012.

The building is jointly owned by Keppel REIT, DBS and Hongkong Land.

PhillipCapital has issued unrated reports on Keppel REIT and Hongkong Land. The brokerage has rated DBS at “accumulate” with a target price of $29.50.

As DBS joins the likes of other financial institutions in trimming their office space, Ong says the office market is “likely” to face some “leasing pressure” from downsizing in favour of hybrid or rempote working arrangements.

In the hospitality sub-sector, revenue per average room (RevPAR) was down 46% y-o-y in February while hotel occupancies stood at 44% and 42% in January and February respectively. Some 73% of Singaporeans have not utilised their SingapoRediscover Vouchers yet, and Ong sees the sector as likely to face another boost in occupancies during the upcoming June school holidays.

Rising interest rates

While rising interest rates are expected to hurt REITs, Ong says she expects further interest rate growth to be capped in the near term.

Across the sectors, retail REITs hedge the least against rising 10YSGS yields at 54.3% of their fixed-rate debts. The other sub-sectors employ hedge ratios of above 72%.

“10YSGS yields climbed 83basis points (bps) from 4Q2020’s 0.89% to 1.72% at the beginning [of] April. Our sensitivity analysis suggests that in the worst case assuming no hedging, a 100bps increase in borrowing rates will result in a -6.1% to -29.6% impact on FY2021 DPUs,” writes Ong.


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“If the various interest-rate hedges that REITs employ are taken into consideration, a 100bps increase in borrowing rates will have a 0% to -15.7% impact on FY2021 DPUs for REITs under our coverage.”

“Overall, the impact of rising interest rates should be mitigated by hedging strategies and well-distributed debt maturities ranging from three to seven years,” she adds.