On Sept 22, the US Federal Reserve signalled that it could start tapering bond purchases in November, while interest rate hikes could potentially happen next year.
Pursuant to the Fed's announcement, UOB Kay Hian analyst Jonathan Koh has reiterated his "overweight" rating for the Singapore REITs (S-REITs) in a Sept 24 research note.
In view of the hikes, Koh believes that S-REITs with high interest coverage ratios and long average maturity of debts will be better able to cope with higher interest rates.
He estimates that every 0.1 percentage point increase in costs of debts will reduce S-REITs' distribution per unit (DPU) by 0.6%-1.9%.
See also: UOBKH maintains 'overweight' on S-REITs as Covid-19 cases surge
“Suntec REIT’s 2022 DPU is expected to drop by 1.9% due to low interest coverage ratio of 2.8 times. Far East Hospitality Trust’s 2022 DPU is expected to drop 1.7% as the hospitality industry would only benefit from a full-fledged recovery later in 2023,” he comments.
Koh highlights that during the last interest rate upcycle from 2016 to 2018, most S-REITs were able to keep their cost of debts relatively stable. “There are various factors that determine the magnitude of impact from fluctuations in costs of debts, including interest coverage ratio, existing interest rate for loan to be refinanced and the level of fixed interest rates locked in through hedges,” he says.
Since then, Koh also views that S-REITs have become more resilient. “S-REITs have scaled up due to industry consolidation and acquisitions locally and overseas. Their increased scale and diversification, geographically and by asset classes, improve their standing with bankers,” he explains.
To that end, he believes S-REITs are able to garner support and obtain competitive interest rates from banks for their refinancing. He also notes that S-REITs are disciplined in capital management, with aggregate leverage “well within” the cap of 50% imposed by the Monetary Authority of Singapore.
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Singapore’s transition from pandemic to endemic should also be a supporting factor for the sector. “82% of Singapore’s population has completed their full regimen and received two doses of Covid-19 vaccines, which paves the way for the easing of safe distancing measures, normalisation of economic activities and an eventual pick-up in GDP growth,” he says.
Given these factors, he has kept his “overweight” rating for the sector and recommends a balanced mix of new economy and reopening plays. His picks for new economy plays are Ascendas REIT, Frasers Logistics & Commercial Trust, Mapletree Industrial Trust and ARA LOGOS Logistics Trust, while his picks for reopening plays are Ascott Residence Trust, Frasers Centrepoint Trust and Lendlease Global Commercial REIT.