JPMorgan takes ‘cautious’ outlook on S-REITs, says DPU declines are likely in 2023

Lim Hui Jie
Lim Hui Jie12/22/2022 04:23 PM GMT+08  • 3 min read
JPMorgan takes ‘cautious’ outlook on S-REITs, says DPU declines are likely in 2023
There could be a 'tactical opportunity' for REITs to outperform when rate hikes pause. Photo: Bloomberg
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JPMorgan has taken a ‘cautious’ outlook on Singapore REITs (S-REITS), saying that they expect a decline in distribution per unit (DPU) as well as a potential economic slowdown to weigh on share price performance in 2023.

In their report dated Dec 15, analysts Mervin Song, Terence Khi and Cusson Leung write that their DPU forecasts for FY2023 and FY2024 are 2% to 17% below consensus estimates, explaining that DPU declines over the next two years are likely.

Overall, they forecast a 1% per annum (p.a.) decline in overall S-REIT DPU, with larger DPU declines for some REITs, such as Mapletree Industrial Trust (MINT),

This is due to the impact of the US Federal Funds rate hitting 4.85%, the Secured Overnight Financing Rate (SOFR) reaching 5% and the Singapore Overnight Rate Average (SORA) at 4.5% by March 2023.

They foresee that these rates will be held until rate cuts commencing in the second quarter of 2024.

Despite this, they see a “tactical opportunity” ahead, noting that “historically, when the Fed pauses [rate hikes], S-REITs outperform the STI by 4-7% and Singapore banks 7-22%.”

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JP Morgan expects rates to peak in March 2023, and say that their top picks that offer relative DPU resilience ahead of the full impact of rate hikes are Capitaland Ascendas REIT (CLAR), Capitaland Integrated Commercial Trust (CICT), Keppel DC REIT (KDCREIT) and Frasers Logistics & Commercial Trust (FLCT).

These picks “offer relative DPU resilience ahead of full impact of rate hikes,” they say, adding that they believe that these REITs have largely priced in projected DPU cuts.

Furthermore, they think that these REITs will be beneficiaries of investors seeking resilient yield with growth opportunities during a Fed pause.

Separately, the analysts also see Capitaland China Trust (CLCT) offering a pure-play exposure to China’s reopening.

See also: Simple solutions for these two REITs

Among their coverage, the analysts see CLAR, CICT, KDCREIT and the hospitality REITs as likely to be the most resilient.

This is due to prior acquisitions and completion of developments and asset enhancement initiatives (AEIs), as well as continued travel recovery, translating into stable or increasing DPU.

On the other hand, office REITs are most vulnerable to higher rates given Singapore office REITs trade at the tightest cap rate of around 3.5%.

The cap rate refers to an assessment of the yield of a property over one year.

“We anticipate the greatest risk to office property values in the event of cap rate expansion next year,” they say, with gearing to increase by 2.5% percentage points and net asset values to fall 10% for every 25 basis points (bps) rise in cap rates.

Additionally, the analysts also elaborate that with a potential slowdown from a US recession and tech job losses, they expect Singapore office demand to stall and rents for 2023 and 2024 to stabilise at -1% and 1% respectively, down from their previous forecast of 5% and 3%.

The analysts conclude: “A rising tide may lift all boats, but we believe defensive REITs, such as FLT and KDCREIT with low gearing and/or exposure to structural growth in warehouse and data centers, should outperform cyclical office exposures.”

However, they warn that after the Fed pause, rate cuts in a recession may lead to share price declines.

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