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S-REITs kept at 'neutral' by OCBC as rising yields cancel out improving fundamentals

PC Lee
PC Lee • 3 min read
S-REITs kept at 'neutral' by OCBC as rising yields cancel out improving fundamentals
SINGAPORE (May 24): The S-REITs sector, using the FTSE Straits Times REIT Index (FSTREI) as a benchmark, is down 6% year-to-date at the close on Tuesday. Including dividends, the sector posted total returns of –3.4% year-to-date.
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SINGAPORE (May 24): The S-REITs sector, using the FTSE Straits Times REIT Index (FSTREI) as a benchmark, is down 6% year-to-date at the close on Tuesday. Including dividends, the sector posted total returns of –3.4% year-to-date.

“We believe this decline has been driven by concerns over a rising interest rate environment, as government bond yields have also seen a spike since the start of the year,” says OCBC Investment Research Andy Wong in a Wednesday report.

The Singapore government 10-year bond yield is currently at 2.67%, a relatively significant increase versus the 2.00% level seen as at the end of 2017. Given that the FSTREI is trading at a forward distribution yield of 6.0%, this implies that the yield spread against the Singapore government 10-year bond yield is 334 bps.

And despite the YTD price correction, Wong says valuations are still stretched as this yield spread represents two standard deviations below the five-year average of 410 bps.

Still, the operational outlook of S-REITs appears more positive amid firmer underlying industry fundamentals, says Wong.

OCBC says of the 23 S-REITs under its coverage, 19 reported 1QCY18 results which met expectations, while only four missed.

And although average DPU growth came in at –2.6% on a y-o-y basis, OCBC says the operational outlook of S-REITs appears more positive, especially for the office sub-sector, where signing rents have improved firmly in tandem with the robust recovery in market rents.

Looking ahead, OCBC is projecting stable market-cap weighted DPU growth of 1.9% for the current financial year and 1.6% for the next financial year.

Wong says one of the key trends supporting this which emerged since late last year was the expansion of S-REITs into new geographical markets.

Following Mapletree Industrial Trust’s and Frasers Commercial Trust’s decisions to enter the US and UK data centre and business park industries in Dec 2017 and Jan 2018, respectively, other REITs have followed suit.

Mapletree Industrial Trust in JV to acquire 14 data centres in US for $1.02 bil

Frasers Centrepoint and Frasers Commercial Trust acquire Farnborough Business Park for $314.8 mil

This includes Mapletree Greater China Commercial Trust in Japan, Frasers Logistics & Industrial Trust in Europe and CapitaLand Commercial Trust in Germany.

MGCCT acquiring six properties in Japan for $753 mil; to be renamed Mapletree North Asia Commercial Trust

Frasers Logistics Trust buys portfolio of 21 properties in Germany, Holland from sponsor for $515 mil

CapitaLand Commercial Trust acquires 94.9% stake in $569.6 mil Frankfurt office property Gallileo

The acquisitions were attractive as they included freehold land, high occupancy rates with long WALEs and lower cost of funding in local currency terms.

Another major event was the proposed merger between the REIT managers of ESR-REIT and Viva Industrial Trust. Should it be successful, this could create the fourth largest industrial REIT in Singapore and set the stage for further consolidation in the industry.

Says Wong, “Maintain “neutral” on the S-REITs sector, with a selective stock picking approach remaining key at this juncture. Our preferred picks are Frasers Logistics & Industrial Trust with fair value of $1.21; Frasers Centrepoint Trust with fair value of $2.49 and Mapletree Greater China Commercial Trust with fair value of $1.42.”

As at 3.07pm, units in FLT, FCT and MGCCT are trading at $1.03, $2.18 and $1.14 respectively.

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