Singapore REITs - OCBC Investment 2016-06-30: Tailwinds ahead for defensive yield stocks

Singapore REITs - OCBC Investment 2016-06-30: Tailwinds ahead for defensive yield stocks ASCENDAS REAL ESTATE INV TRUST A17U.SI  FRASERS CENTREPOINT TRUST J69U.SI  KEPPEL DC REIT AJBU.SI 

Singapore REITs: Tailwinds ahead for defensive yield stocks

  • Uncertain outlook
  • Yield plays back in favour
  • Top picks remain FCT, KDCREIT and AREIT

Brexit sparks market turmoil

  • Following the surprise outcome of the UK voting to leave the EU, financial markets have endured a turbulent time, with major equity markets experiencing an initial meltdown, coupled with heightened volatility in the FX markets. 
  • Amongst our S-REITs coverage, we believe Ascott Residence Trust (ART) will be the most affected, as it derived 12.4% and 13.0% of its total assets and gross profit from the UK in FY15, respectively. Based on our understanding, ART does not hedge its estimated distributable income in GBP, although there is some natural hedge on its balance sheet. Hence we believe ART will be negatively impacted by a depreciation in the GBP. 
  • Although Keppel DC REIT’s (KDCREIT) data centre in London contributed 7.5% of its FY15 investment properties’ carrying value, we believe the impact will be minimal. This is because the asset is backed by a long master lease which expires in 2027 and management has also hedged 100% of its foreign-sourced distribution up till end 2017.

Lower probability of a Fed rate hike; tailwinds ahead for yield plays

  • The uncertainty over the global economic outlook caused by a Brexit has raised questions over the path of the federal funds rate. 
  • During Federal Reserve Chairperson Janet Yellen’s recent testimony to Congress, she mentioned that a UK vote to exit the EU could have significant economic repercussions. Based on the federal funds futures rate, the probability of at least one rate hike by Dec this year has fallen drastically to 11.8%, down from 76.2% at the start of Jun. 
  • Given the continued vagaries in the macroeconomic and geopolitical landscape, we see a structural shift towards a prolonged period of accommodative interest rates and believe that defensive yield plays are likely to enjoy significant tailwinds ahead, in our view. As such, we are upgrading our rating on the S-REITs sector from ‘Neutral’ to OVERWEIGHT, although we are cognisant of the headwinds that may pose operational challenges in the near-term.

Reiterating our top picks

  • Our top S-REIT picks have performed relatively well amid the current volatile market conditions. We reiterate our ‘BUY’ ratings on them, given their defensive attributes, strong management team and healthy financial position. 
  • Following the Brexit outcome announcement, the share prices of Frasers Centrepoint Trust, KDCREIT and Ascendas REIT have increased 4.0%, 2.8% and 6.0%, respectively, versus the STI’s flat performance and FTSE ST REIT Index’s 3.6% gain.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-06-30
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