Singapore Strategy 2019 ~ REITs - RHB Invest 2018-12-14: Selective Yield Plays Likely To Remain In Favour

Singapore Strategy 2019 ~ REITs - RHB Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) CDL HOSPITALITY TRUSTS (SGX:J85) STARHILL GLOBAL REIT (SGX:P40U) MANULIFE US REIT (SGX:BTOU)

Singapore Strategy 2019 ~ REITs - Selective Yield Plays Likely To Remain In Favour

  • With an increasingly volatile macro-economic outlook, we believe investors are still likely to stick to defensive yield plays like REITs. While we do not expect a broad-based outperformance from the S-REIT sector, stock-specific catalysts should find favour with investors.
  • The demand-supply 2019F outlook for most of the sub-segment of REITs is positive, and will help mitigate the threat of rising interest rates. Inorganic DPU growth is also expected from the acquisitions REITs have made in recent years.
  • The sector is relatively well equipped in terms of balance sheet hedging, to mitigate rising interest costs.
  • Among the sub-sectors, we prefer the industrial and hospitality REITs, as they are well-poised to tap into demand growth.



Valuations are closer to mean.

  • S-REITs (average) are currently trading at a 390bps yield spread to the Monetary Authority of Singapore’s 10-year bond yield. To compare, the 10-year average mean spread (ex-Global Financial Crisis) stands at 400bps. In terms of P/BV, the sector is now trading at par to the 10-year average mean of 0.98x (see Figure 96 & 97 in the PDF report attached).
  • While valuations are closer to mean, we do not think they are stretched – as S-REITs tend to trade at a premium when the growth outlook is positive. Additionally, S-REITs still offer the highest yields and yield spreads over 10-year government bond yields, among REITs globally (see Figure 98 in the PDF report attached).


Possible excess liquidity from en bloc proceeds could flow into REITs.

  • While the latest en bloc cycle has resulted in liquidity injections of ~SGD19bn (en bloc sales in 2017-2018), the bulk of these proceeds is still not received. Post recent cooling measures – based on our anecdotal observations – most en bloc sellers are either taking a longer time (the wait-and-watch approach) or considering downsizing before buying another property.
  • With S-REITs being a favoured investment option among high net worth individuals and retailers, there is a good chance the excess liquidity could flow into relatively defensive REIT counters.


Balance sheets in a better position to mitigate rising interest costs.

  • On average, close to 80% of REITs’ debts are hedged, with only < 20% of total debt due for renewal up until 2020 (see Figure 100 in the PDF report attached).
  • Overall, sector gearing also remains modest at 36%, well below the 45% maximum threshold.
  • Additionally, many REITs have also diversified their funding options to include instruments like perpetual securities, retail bonds and multi-currency medium-term notes, and preferential offerings.


Prefer industrial and hospitality REITs

  • Prefer industrial and hospitality REITs mainly on the back of favourable demand-supply dynamics and attractive valuations.
  • While office segment rental rates have been on a steady uptrend, the positive effects are likely to be seen in DPU only in late 2019. As such, we believe the sub-sector would be more of a 2H19 play.
  • The retail segment still remains challenging, with many key shopping malls adding to the supply in 2019 and rental rates are likely to stay flattish.
  • We recommend investors to buy on dips for retail and office REITs.





Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900
BUY MAINTAIN BUY 1.800 SAME 1.800
BUY MAINTAIN BUY 0.800 SAME 0.800
BUY MAINTAIN BUY 0.920 SAME 0.920





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