The REITs Pulsebeat - Stay Selective
- We continue to remain cautiously optimistic on S-REITs despite threats of Fed rate hikes.
- We believe the sector has factored in two rate hikes this year, with the average yield spread being 30 bps higher than its 10-year average.
- S-REITs still offer the highest yields (average: 6.4%) as well as yield spreads among its global peers. We see room for yield compression as Singapore grows in stature as a REIT hub from a steady pipeline of REIT IPOs.
- We advocate a bottom-up approach in selecting REITs.
- Our Top Picks are Ascendas REIT, CapitaLand Commercial Trust and Manulife US REIT.
Cautiously optimistic despite rate hike threats.
- YTD, S-REITs are up 3.3% - outperforming its global peers but falling short of the Straits Times Index’s (STI) +8.7%.
- Still, S-REITs offer the highest yields globally (FY17 average: 6.4%) and yield spread over 10-year government bonds.
- While growth stocks have gained favour since early 2017 on the back of optimism stemming from Trump’s favourable policy stance and early signs of a pick-up in the economy, risks remain from rising protectionism, financial vulnerabilities from rising rates and the rapid growth of private sector credit as highlighted by latest Organisation for Economic Cooperation and Development (OECD) report. We believe this uncertain environment would help to sustain the interest in S-REITs for 1H17.
Yield spreads still above historical mean.
- S-REITs on average are trading at a 440bps premium to 10-year treasury vs 10-year average spread of 410bps (exGFC period). The REITs are currently trading at a 0.95x P/BV mean vs the 10- year mean of 0.98x.
- With the yield spread still at 30bps above average, the potential impact from two interest rate hikes (our base-case scenario) is largely factored in.
- The hospitality REITs sub-sector offers the highest yield spread of 490 bps, while healthcare REITs offer the lowest yield spread of 340 bps.
Well-managed debt position cushions impact on borrowing costs.
- S-REITs’ current average net gearing stands at 35%, well below the maximum limit of 45%.
- Only about 8%/20% of the total aggregate debts outstanding are maturing in FY17-18 respectively.
- Our calculations show REITs are well prepared for a rate hike, with ~79% of the total debt profile being in fixed rates or hedged.
Singapore’s stature as a growing regional REIT hub.
- Amid an overall lull in the IPO market, Singapore has been successful in growing its stature as a REIT hub with the listing of three diverse REITs in 2016, raising SGD1.27bn (~68% of total IPO listings).
- S-REITs had a positive start in 2017, with the listing of Dasin REIT in Jan 2017.
- Media reports have highlighted at least three more in the pipeline (Cromwell REIT, Amare/Greenland REIT and RTO of Saizen REIT).
- Among the sub-sectors, we favour exposure to the business park space due to favourable demand-supply dynamics. The supply glut facing the office and hospitality segments is expected to slowly fade in 2018, resulting in better market conditions.
- Amid a challenging environment, we recommend a bottom-up approach and expect REITs with strong balance sheets, diversified assets and stock-specific catalysts to outperform its peers.
- Top Picks: Ascendas REIT (AREIT SP. BUY, TP: SGD2.65), CapitaLand Commercial Trust (CCT SP. BUY, TP: SGD1.68) and Manulife US REIT (MUST SP. BUY, TP: USD0.96).