UOB Kay Hian 2015-08-28: Singapore REITs - Upgrade To OVERWEIGHT On Attractive Risk-Reward Proposition.

Singapore REIT

REITs: Upgrade To OVERWEIGHT On Attractive Risk-Reward Proposition 

  • We upgrade the REITs to OVERWEIGHT post the 22% correction on average (5%- 46%) from their recent highs amidst the global market rout. SREITs offer attractive 2:1 Reward-to-risk proposition even as we reduce our target prices by upto 14% to factor in slower growth forward for all REITs. 
  • We upgrade AREIT and ART to BUYs (from HOLDs). 
  • We prefer deep value and diversified REITs with ART, MLT, Starhill Global and CCT as our top picks. 

WHAT’S NEW 

  • We see very attractive risk-reward opportunities in S-REITs which have corrected 22% on average (5-46%) from their recent highs amid the global market rout on concerns such as interest rate hikes, disinflationary pressure from dropping oil prices and a slowing Chinese economy affecting global growth. 

ACTION 


• Upgrade to OVERWEIGHT. 

  • SREITs offer attractive risk-reward proposition even as we lower our target prices by 1% to 14% to factor in slower growth for all REITs (rental growth revisions of up to 8% drop in rents, terminal growth revisions of 20-50bp). Based on our revised target prices, we upgrade AREIT and ART to BUY (from HOLD). We prefer deep value and diversified REITs, with ART, CCT, MLT and Starhill Global as our top picks. 

ESSENTIALS 


• A 2:1 reward-risk ratio. 

  • The current sell-down of S-REITs has led to a tantalising 4.4% yield spread over 10Y SGS, in comparison to an upcycle average of 2.8%. Yield compression to the upcycle average implies an upside potential of almost 60% to the 2004-07 upcycle spread of 2.8%, which is nearly double the downside risk of 30% in the event of a yield expansion to probability weighted average of downcycle of 6.3%. Yield compression to long-term spread of 3.9% implies a 15% upside. 

• Vehicle of choice to ride market volatility offering best of both worlds. 

  • We believe REITs are ideal in the current volatile market environment as they can be seen as a hybrid of debt and equity. Expect debt-like stable yield income during the down markets and equity-like capital appreciation during upmarket cycle. With rising expectations of a delay in interest rate hike in the US, this will benefit REITs in the near term as investors chase yields. In the medium term when interest rates are raised eventually, REITs will transit from being viewed as yield vehicle to growth vehicle, and will continue to see interest. We believe the Fed will raise interest rates once the signs of growth are very clear. 

• Positive US REIT and S-REIT returns during rate hike cycles

  • Positive US REIT and S-REIT returns during rate hike cycles, with the US REITs (FTSE NAREIT All Equity Total Return Index) doubling from mid-04 to end-06 when US FFTR rose 425bp from 1% to 5.25%. US REITs also gained 3% during the previous rate hike cycle in mid-99 to mid-2000 when FFTR rates were hiked 175bp to 6.5% from 4.75%. Similarly, SREITs rallied in the last rate-hike cycle, with the FTSE ST REIT Index surging 83% from 500 in mid-04 to 914 by end-06, despite the 3M SIBOR more than tripling, rising from 0.75% to 3.44% over the same period. As REITs rallied, yields were compressed by 230bp, falling from 7% in mid-04 to 4.66% by end-06. 

• Prefer deep value and diversified REITs. 

  • We like deep value and well diversified REITs with significant overseas footprint, namely ART, CCT, MLT and Starhill. We believe these counters will see less exposure to the slowdown in Singapore affecting the commercial, industrial, retail and hospitality space domestically owing to an unprecedented simultaneous supply glut across sectors. 
  • Already adopting a risk-free rate of 3%, which is in line with the average 3.1% 10-Year Singapore government bond rate between 2003 and 2006, and is 32bp higher than the current rate of 2.68%. 

• Interest rate sensitivity analysis. 

  • A 100bp increase in the RFR and interest costs would result in a 16.4% and 8.1% respective correction to our target prices for REITs. Defensive REITs, eg PLife and CMT, are most sensitive to changes in RFR due to lower initial yields as a low-base effect amplifies sensitivity when yields rise. REITs with higher gearing and lower financing costs will be more impacted by rising rates, eg MIT and Suntec REIT, although rental growth will cushion the impact of rising rates.





Vikrant Pandey | Derek Chang | http://research.uobkayhian.com/ UOB KH 2015-08-28
BUY Upgrade HOLD 1.41 Down 1.42
BUY Maintain BUY 1.79 Down 1.95
BUY Maintain BUY 1.28 Down 1.32
BUY Maintain BUY 0.96 Down 0.91


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