DBS Group Research analysts Derek Tan, Dale Lai, Rachel Tan and Geraldine Wong are positive on Singapore REITs (S-REITs), noting that now would be a good time to increase exposure to the sector.
Units in S-REITs took a hit amid the rising interest rate environment, which peaked in October 2022. However, the cooling inflation in the US may bring about the possible end to rate hikes in the 1Q2023.
“After hitting a peak in October 2022, the interest rates environment in Singapore has taken a breather. The Singapore 10-year government bond yield has declined by 60 basis points (bps) to 2.8% on the back of cooling inflation and modest economic backdrop,” the analysts write.
“Similarly, shorter-term funding rates have also declined from peaks, albeit still high compared to two to three years ago, reducing the refinancing heat for S-REITs,” they add.
At this point, unit prices in S-REITs have “stabilised” with the sector seeing a relative outperformance against the benchmark Straits Times Index (STI) in December 2022.
“S-REITs, with a headline FY2023 yield of 6.2%, offer a yield spread of 3.4% against the 10-year yield,” the analysts note.
During the pauses amid the Fed rate hikes, the S-REITs were “strong performers”. In their report, the analysts note that in 2018 to 2019 when the Fed paused its hikes, S-REITs outperformed the STI by 2.5 times, returning 18% before dividends over a six-month period, compared to the STI’s return of 8%.
To this end, as the Fed is expected to tone down its hawkish hike momentum, albeit delivering a further 50 bps increase in the Fed funds rate before pausing its hikes.
In this period, the analysts believe that the overhang for the S-REITs would be removed. The sector also looks set to recapture its relative outperformance.
To them, “early birds” may “get rewarded with an additional 200 bps in alpha” when they positioned themselves during the trough in S-REIT prices.
Back in 2018 to 2019, the trough took place around two months before the last rate hike.
“As such, in view of a possible end in the current rate hike cycle in 1Q2023, we believe that investors should look to position in the S-REITs sooner, rather than later,” the analysts write.
China’s gradual re-opening and border relaxation measures will also have positive implications for S-REITs.
The market optimism of China’s re-opening will benefit, in particular, the analysts’ picks, Mapletree Pan Asia Commercial Trust (MPACT), CapitaLand Ascott Trust (CLAS) and CapitaLand China Trust (CLCT), which are the most leveraged in exposure.
“We believe that the focus will then move towards the impact of a recession, and we believe that suburban retail (Frasers Centrepoint Trust or FCT, Lendlease Global Commercial REIT or LREIT and CapitaLand Integrated Commercial Trust or CICT) and industrial names (CapitaLand Ascendas REIT or CLAR, Frasers Logistics and Commercial Trust or FLCT and CapitaLand India Trust or CLINT) are names that offer better relative distribution per unit (DPU) resiliency with capacity for upside surprises,” say the analysts.