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RHB positive on S-REITS, DBS picks A-REIT as top S-REIT

Lim Hui Jie
Lim Hui Jie2/11/2021 08:02 AM GMT+08  • 5 min read
RHB positive on S-REITS, DBS picks A-REIT as top S-REIT
S-REITS seems more poised for a recovery compared to M-REITS, with Ascendas REIT being the top pick.
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RHB Group Research’s Loong Kok Wen and Vijay Natarajan have maintained their “overweight” call on Singapore REITs (S-REITs), and a “Neutral” call on Malaysian REITs (M-REITs).

In a 10 Feb note, the analysts said they prefer S-REITs over M-REITs, as Singapore has successfully contained the spread of Covid-19 compared to its neighbour up north.

They note the country has already moved to Phase 3 of reopening its economy, which means the prospects for earnings recovery are more attractive, and the asset value of S-REITs should be relatively more stable.

Loong and Natarajan advised investors to position for small and mid-cap S-REITs for a post-pandemic recovery play, given the better valuations, “Recovery in Malaysia is now delayed, possibly until late 2021.” they caution.

More specifically, they think that industrial REITs are the winners, as they are generally trading at premium valuations, compared to their peers in other segments, given the sector’s resilience against the pandemic.

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The analysts said they think this advantage will stay, supported strongly by the rising e-commerce and digital trend, which should continue to boost demand for data centres, and logistics and warehousing spaces in the region.

Elsewhere, they believe Singapore office REITs are poised to capture regional expansion by technology, media and telecommunications (TMT) players.

“While the office sector in Malaysia will continue to see pressure on occupancy and rental reversions, the situation is more favourable in Singapore, where top TMT players have been busy hiring and expanding.” they add.

To a certain extent, Singapore has also benefited from US-China trade tensions and the Hong Kong protests, which have resulted in many Chinese technology and financial firms moving to the country.

However, they think that the retail REITs will suffer from a “structural shift”, apart from Covid-19’s impact.

Loong and Natarajan said “The pandemic has accelerated the structural shift towards online shopping/omni-channels. We believe retail mall players in the region will have to re-strategise in terms of their tenant mix and retail concepts, so that brick-and-mortar stores remain relevant over the long term.”

As such, they prefer retail malls in Malaysia that have higher exposure to domestic shoppers, and suburban malls in Singapore for the focus on necessity shopping, as earnings from these malls should be relatively more resilient.

Over in the hospitality sector, they said the “opportunistic rebound” in hospitality REITs in Singapore may be short-lived.

Hospitality REITs in Singapore have rebounded since the vaccine announcements, and the valuation gap has now shrunk to mean levels.

As such, they are neutral on this segment, adding that the number of Covid-19 cases remains high globally. As a result, international visitor arrivals may only improve further in 2H2021, on expectations of a widespread vaccine roll-out.

On both sides of the Causeway, corporate exercises in the pipeline, Loong and Natarajan note, and M-REITs with strong balance sheets should be on an acquisition drive, and they expect some assets to be put up for sale this year. Given the region’s low-interest rate cycle, REIT managers generally think it is a good time to buy distressed assets.

Conversely, in Singapore, some new REIT listings delayed from last year are expected to be put into the market this year.

The analysts give all their top picks in Singapore a “buy” rating, with target prices of $1.79 for Suntec REIT, US$1 for Prime US REIT, and 74 cents for ARA Logos Logistics Trust. Across the Causeway, they also give a “buy” rating to Axis REIT, with a target price of RM2.30

SEE: Advantage of size underpins Ascendas REIT as market awaits data centre portfolio

DBS picks A-REIT as top S-REIT pick

Meanwhile, DBS’s analysts Rachel Tan and Derek Tan have picked Ascendas REIT (A-REIT) as their top pick in the S-REIT sector, beating out Capitaland Integrated Commercial Trust (CICT) in their comparison between the two largest REITs.

The analyst notes that both have yields of about 5%, but A-REIT has “more attractive valuations vs its large cap industrial peers by about 19%, yields are more than 100 basis points higher and price to net asset valuation (P/NAV) is 11% lower.”

In addition, they note the planned acquisition of A-REIT’s pipeline from its sponsor should drive a re-rating and close its gap vs its peers who have been outperforming S-REITs by about 21% since Dec 2019.

Furthermore, they think A-REIT’s portfolio has lower earnings risks, as the majority of its assets are beneficiaries of rising demand from e-commerce. The analysts note that about 74% of its portfolio comprises of new economy assets in business parks, logistics and hi-specs & data centers. Downside risk will stem from about 9% contributions from general and light industrial properties which face a “supply hump” in 2021.

On the other hand, we estimate about 54% of CICT’s tenant trade sectors may see a slower rebound in 2021 given the lasting impact from Covid-19, while office occupancies may be impacted if more firms adopt to crystalize occupancy savings through the adoption of flexible work arrangements.

They elaborate that since Dec 2019, both A-REIT (+3.7%) and CICT (-12.6%) have underperformed its respective sectors. But when compared to the SREIT sector which has risen 1.9%, AREIT has outperformed marginally while CICT is still a laggard, in line with the performance of their respective sectors.

The analysts also said CICT’s share price has yet to recover to pre-COVID which is in line with the commercial sector.

“Although AREIT’s share price has recovered back to pre-COVID, its peers’ share prices have run ahead of all other sectors, increased more than 20% since Dec 2019 benefiting from the rise of e-commerce and increased demand for data centres.” they highlighted.

AREIT closed at $3.07 on Feb 10, while CICT closed at $2.14

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