Singapore REITs (S-REITs) kicked off the year with a bullish start, as January was its best performing month since 2020, as the S-REITs index rose some 6.6% m-o-m, surpassing the general Straits Times Index (STI) that only saw a 3.5% m-o-m increase.
Across the subsectors, the US office sector was the best-performing subsector, up 18.2% m-o-m, followed by the data centre subsector (+12.3% m-o-m) and China-focused REITs (+8.7% m-o-m).
The US office sector posted a V-shaped recovery, which DBS Group Research analysts Geraldine Wong and Derek Tan believe could be due to a valuation trade after losing close to about 40% of value in 2022, trading at only 0.5x P/B on average.
Data centre REITs also saw a sharp pick-up in share price, alongside the US office sector, after both these subsectors had ended 2022 with a sharp full-year share price decline, while China-focused REITs continued to thrive on reopening enthusiasm following a strong month in December 2022.
The best-performing stocks for the month included Prime US REIT (+28.5% m-o-m), Keppel Pacific Oak REIT (+16.3% m-o-m), and Digital Core REIT (+14.5% m-o-m).
Despite the strong performance, the REITs are affecting by the high interest rate environment. While a strong rebound was seen at the start of the year for the S-REITs, interest rates are expected to continue increasing.
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The US Fed, European Central Bank (ECB) and Bank of England (BoE) are expected to announce their first policy of the year soon. The market is expecting the Fed to hike policy rates by 25 basis points (bps) to 4.50%-4.75, as downshift from the rate hike increases done last year.
Economic data has shown the peaking of inflationary pressures and wage growth towards end-2022, and this has been acknowledged by the Fed. As all three central banks continue to be committed to return inflation back to the 2.0% target by engineering a soft landing, the boost to global growth from China’s reopening would be yet another consideration factor for policymakers for the rate hike trajectory for 2023.
DBS economists expect the final target rate to be 5.0% and that a majority of the hikes to be front loaded (ending by the first quarter of 2023 or latest by the first half of 2023). “As such, the rebound in the share prices for S-REITs is playing out as expected, per our last sector report, where we stated that S-REITs will bottom out prior to the Fed pausing hikes, and that historical data indicates that S-REITs turn strong outperformers during Fed pauses,” say Wong and Tan.
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Currently, the results season is underway for the S-REITs and so far, the analysts note that results have met expectations with no material downside risk noted.
“The read-through continues to be generally positive across most subsectors, especially for Singapore-centric exposure,” say the analysts.
Positive reversions and an increase in occupancy were generally witnessed across all sectors with China’s reopening and easing recessionary sentiments. The industrials and office sectors continue to deliver strong positive reversions in the range of 5%-10%, remaining ahead in the property cycle. The office sector continues to be supported by low upcoming grade A supply in Singapore, with physical occupancy returning to about 70%, ahead of other overseas markets. The retail sector saw a stronger turnaround in reversions in 4Q2022, with downtown reversions turning positive for the first time (CICT results, 4Q2022). Hotels continue to recover on a broad basis with many markets reaching and surpassing Covid-19 levels in revenue per average room (RevPAR) terms.
Portfolio valuation continued to be a key emphasis in end-FY2022, which the analysts note to be generally stable, with unchanged cap rates in Singapore. Overseas assets saw a marginal 25-50bps expansion in in cap rate terms, neutralised by an improving cash flow outlook.
The research house has highlighted Frasers Centrepoint Trust (FCT) in its report dated Feb 3, as the third Mercatus asset – Nex mall – was awarded to the trust. DBS has a “buy” call on FCT with a target price of $2.60.
On Jan 26, FCT announced the joint-sponsor acquisition of a 50% stake in Nex mall, one of the largest suburban malls within the northeast region of Singapore. The joint venture company (JVCo) is 51% owned by FCT and 49% owned by its sponsor Frasers Property. The acquisition consideration was $652.5 million.
The acquisition price implies an net property income (NPI) yield of about 4.8% and will strengthen FCT’s dominance as the top suburban shopping centre landlord in Singapore. The deal will be funded by cash and debt resources, lifting the market overhang for the stock on potential equity fundraising risks, while delivering an accretive deal.
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“The balance sheet is expected to head towards a more optimal about 38.5% post the deal, remaining at healthy levels in comparison to its peers,” say the analysts, as they see this deal as the trust “fortressing [its] Suburban King title” and adding a “new trophy asset to the FCT name”.
See also: Analysts mixed on FCT's acquisition of 25.5% stake in Nex