SINGAPORE (Jan 5): RHB expects selective REITs to continue to remain in favour in 2018 after climbing 21% last year.

While valuations are slightly above mean and rate hike threat persists, RHB says the strong economic pick-up should boost underlying demand and continue to support REITs.

"We remain 'overweight' on the sector," says analyst Vijay Natarajan in a Friday report.

However, Natarajan believes investor attention would now turn to REITs that are likely to benefit from the current economic growth cycle and deliver DPU growth.

Industrial and hospitality sectors are expected to be direct beneficiaries of the economic pick-up and would be further aided by supply tapering.

While the office sector outlook is positive, stocks have priced in most of the upside.

"Retail is our least preferred sector, as weak demand and supply challenges continue to weigh," says Natarajan.

Here is the rundown on the REIT sub-sectors.

Hospitality After peaking in 2012, Singapore hotel RevPAR has been on a gradual decline and is down 2% from its peak. While occupancy has remained steady through the years, room rates have taken a hit due to the higher competition from new hotels. With supply threats diminishing and demand expected to pick up, Natarajan expects hoteliers to regain some of the pricing power. Overall, the analyst expects RevPAR to increase by 3-7% in 2018.

RHB's top pick is OUE Hospitality Trust (OUEHT) with target price of 91 cents.

Industrial Among industrial sub-sectors, Natarajan prefers REITs with exposure to the business parks and hi-tech industrial segment. Demand supply dynamics for business parks remain favourable, with limited supply coming on stream in 2018. Overall, Natarajan expects rents to increase by 3-7% in 2018. For the factory and warehouse logistics segment, he expects rents to stay flattish in 2018, with outlook brightening in 2H18.

RHB's top pick is Ascendas REIT (AREIT) with $2.90 target due to its well-diversified industrial property exposure and efficient capital recycling strategy.

Office Natarajan expects Grade-A office rents to increase by 5-10% in 2018 as demand picks up and supply slows down. Office supply for 2018 is expected to slow down to 1.8 million sf in 2018 from 3 million sf in 2017. Grade-A office rents for 3Q17 have already shown signs of improvement, with rents increasing 1.7% q-o-q after declining 21% since the start of 2015.

Despite the positive sector outlook, we believe office REITs under our coverage are expected to see continued negative rent reversions in 2018 as the expiring rents are still 10-20% above current market rents.

"We remain Neutral on this sub-sector and would recommend investors to wait for a pullback," says Natarajan.

Retail Overall, retail is RHB's least preferred sub-sector among REITs.

Overseas REITs RHB likes Manulife US REIT with 98 cents target for its pure-play office exposure to the rebounding US economy and office market.

"While the recent amendments in US tax regulations have resulted in some changes to the existing tax efficient structure, we understand that the overall impact on unit holders distributions would be minimal," says Natarajan.

As at 12.43pm, units in OUE Hospitality Trust, Ascendas REIT and Manulife US REIT are trading at 87 cents, $2.82 and 94 cents respectively.

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RHB's rundown on REITs for 2018

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