Singapore REITs - DBS Research 2016-11-08: Demand for yields to persist

Singapore REITs - DBS Vickers 2016-11-08: Demand for yields to persist

Singapore REITs - Demand for yields to persist

  • Recent share price weakness due to macro headwinds and profit-taking.
  • Chance to accumulate as market tends to overshoot; valuations supported at – 1 standard deviation.
  • Picks A-REIT, CDREIT, KREIT, FLT, MCT and Croesus.

Recent share price weakness due to increased macro uncertainties. 

  • The 4th quarter has not been a happy time for REIT investors in recent years as prices tended to soften as investors grapple with increased macro uncertainties, and 2016 is no different. 
  • We have seen net outflows for the Singapore REITs (S-REITs) on the back of uncertainties from the outcome of the US presidential elections, a potential rate hike come December 2016 and also profit-taking as REITs are generally still ahead since the start of the year. 
  • Month-to-date prices have come down by 5-10%.

Chance to accumulate when market overshoots; yield spreads and valuations are close to historical –1SD. 

  • While the weakness in share price is not unexpected, we believe that investors should take the opportunity to accumulate as market tends to overshoot. Using historical price performance as a guide, we believe that further downside from current levels appears limited. 
  • Base on the past five years, the S-REITs typically see support at P/NAV ranges of c.0.86- c.0.93x P/NAV and we are already close to those levels. 
  • Another reason for further support in share price is the attractive headline FY17F yield of 6.4%, representing a yield spread of close to 4.6%, above historical mean.

Positioned in value; downside risk. 

  • We believe that investors will continue to focus on yields given the uncertain economic outlook and we believe that REITs fit that bill.
  • Interest rates, while an overhang, are mitigated from the fact that most S-REITs have 
    1. refinanced their loans ahead of expiry, and 
    2. hedged in a substantial portion of their interest rates profile into fixed rate debt.
  • Among S-REITs, we believe that selected office REITs (K-REIT) and hospitality REITs (CDREIT) are attractive at a 15-20% discount to NAVs. 
  • In terms of growth, we believe the likes of A-REIT, FLT and MCT offer investors a clear growth driver and upside to earnings from deploying their strong balance sheets. 
  • Among the small-cap REITs, Croesus offers attractive yield of > 8%.

SREIT Peer Comparison Table

SREIT Peer Comparison - DBS Group Research 2016-11-08

Derek TAN DBS Vickers | Melvin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-11-08