Singapore REITS 2016 Outlook - DBS Research 2015-12-17: Coping with higher interest rates

Singapore REITS 2016 Outlook - DBS Research 2015-12-17: Coping with higher interest rates MAPLETREE GREATER CHINACOMM TR RW0U.SI  CAPITALAND RETAIL CHINA TRUST AU8U.SI  FRASERS CENTREPOINT TRUST J69U.SI  MAPLETREE LOGISTICS TRUST M44U.SI 

Singapore REITS 2016 Outlook - Coping with higher interest rates 

  • S-REITs' performance to be capped as interest rate rise over 2016 
  • Retail and selected S-REITs with overseas exposure best positioned against interest rate risk 
  • Picks MAGIC, CRCT, FCT and MCT 


Outlook 


 S-REITs' performance to be capped as interest rate rise; market is underestimating pace of FED hikes over 2016. 

  • The liftoff in rates come Dec-15 and four additional hikes in 2016 (per DBS economist forecasts) which is 1-2 hikes implied in the FED funds futures, will mean limited upside to share prices for the S-REITs come 2016. 
  • With moderating growth prospects rising operational headwinds, we believe that the SREITs will continue to trade at an above-historical average yield spread against 10-year bonds. Thus, we believe that current share prices for the S-REITs are fair, in our view, given a yield spread of 4.0% (compared against forward 10-year yield of 3.0%). 

 Retail and selected REITs with overseas exposure best positioned against interest rate risks. 

  • We project distributions to grow by 3.3% in FY16F, but see potential downside to DPU estimates from the office and hotel subsectors, given demand-supply imbalances and downside to GDP forecasts. 
  • We believe that selective S-REITs in the retail sector such as Frasers Centrepoint Trust (FCT) and Mapletree Commercial Trust (MCT) can still deliver decent growth in net property income, supported by resilient tenant sales performance and strong asset positioning. 
  • In addition, S-REITs like Mapletree Greater China Trust (MAGIC) and Capitaland Retail China Trust (CRCT) can surprise on the upside due to favourable currency tailwinds. 

 Rising cost of capital to limit acquisitions. 

  • We believe that the greatest obstacle that S-REITs will face is the rising cost of capital, given the sector’s reliance on both debt and equity markets to support its growth initiatives. Opportunities for portfolio expansion are likely to remain limited as investors are likely to frown upon S-REITs that are gearing up to acquire assets. 
  • While S-REITs have been heading overseas in search of higher returns, the uncertainties from increased forex volatility and tax leakages will mean that S-REITs' ability to drive accretion is likely to turn more muted.


Risks 


 Faster-than-expected rate hike momentum. 

  • A stronger-than-expected Fed rate hike momentum in 2016 will mean higher-than-projected interest rates (for both shorter- and longer-term rates across the yield curve), posing risks to our estimates. As such, investors are also likely to require higher yields (and thus lower S-REIT prices) for investing in yield sensitive instruments like S-REITs. 


Valuation & Stock Picks 


 Picks with ability to deliver earnings surprise. 

  • While valuations of the office and hotel REITs are attractive at 0.8x and 0.7x P/BK respectively, we see a lack of catalysts from increasing operational sector headwinds. 
  • Our picks remain SREITs with superior/growth or in sectors leveraged to economic growth; MAGIC, CRCT, FCT and MCT.


S-REIT Peer Valuation






Derek Tan DBS Vickers | Mervin SONG DBS Vickers | http://www.dbsvickers.com/ 2015-12-17
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.69 Same 1.69
BUY Maintain BUY 2.05 Same 2.05
BUY Maintain BUY 1.15 Same 1.15
BUY Maintain BUY 1.11 Same 1.11


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