Singapore REITs - OCBC Investment 2020-03-04: Selective Opportunities But Watch The Economic Impact

Singapore REITs - OCBC Investment Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) CAPITALAND MALL TRUST (SGX:C38U) SUNTEC REAL ESTATE INV TRUST (SGX:T82U) FRASERS LOGISTICS & IND TRUST (SGX:BUOU) ESR-REIT (SGX:J91U)

Singapore REITs - Selective Opportunities But Watch The Economic Impact




50 bps rate cut by the Fed to 1.00-1.25% in emergency meeting

  • The Federal Reserve has fired a salvo by cutting the Fed funds rate by 50 bps to a target range of 1.00-1.25% in an emergency meeting on 3 Mar. This has perhaps raised more questions than answers as the sudden move by the Fed has created more uncertainties and concerns over the impact of the COVID-19 outbreak.
  • In fact, the FTSE Straits Times REIT Index (FSTREI) had tumbled 7.3% in the week of 24th Feb, which we believe was the result of the markets pricing in some concerns of global recession risks due to the COVID-19 situation becoming more widespread. See Share Price Performance - S-REITs Sector.
  • Our house view on the broader market is that it is too early to buy equities on this correction, but our base case is that the virus outbreak would not derail the long-term economic expansion.


Selective opportunities but nimble approach preferred

  • While lower rates can typically be seen as a positive for yield instruments, we would like to emphasise that the drivers behind the rate movement would be the key determinant on how the S-REITs sector is likely to perform ahead. This emergency cut could suggest that the Fed is concerned on the COVID-19 outbreak escalating into a global pandemic, which would hurt economic growth at least in the near-term.
  • Anecdotally, we note that when the Fed cut its benchmark rate from 5.25% to 4.75% (mid-point) in Sep 2007 and subsequently over several sessions to 0.125% in Dec 2008, the FSTREI slumped 63.3% as this was during the Global Financial Crisis.
  • On the other hand, when the Fed cut the Fed funds rate from 2.375% to 2.125% (mid-point) on Jul 2019 and subsequently two more times to 1.625% on Oct 2019, the FSTREI rose 2.0% as these were seen as insurance cuts rather than a severe deterioration in the economic outlook at that point in time. Given this COVID-19 backdrop and the uncertainties surrounding it, we would continue to be selective and adopt a nimble approach towards the accumulation of S-REITs.


Valuation has turned more favourable, but expect volatility to stay

  • Given the sharp compression in sovereign bond yields and the correction in the S-REITs sector last week, the forward yield spread between the FSTREI (5.59%) and the Singapore government 10-year bond yield (1.46%) has now widened to 413 bps (as at 3 Mar close). This is in-line with the 10-year average of 411 bps. Since the start of 2Q17, we note that there were only minimal instances whereby the yield spread had gone above the historical average levels, in light of the hunt for yield theme (REIT share prices appreciated faster than sovereign bond yields compressed). The last time this happened, it was during the last two weeks of Dec 2018 to early Jan 2019.
  • Given growing concerns of COVID-19, we have a preference for industrial REITs and retail REITs which have corrected sharply. As such, we reshuffle our preferred picks list and add in Frasers Logistics & Industrial Trust (SGX:BUOU) [BUY; FV: S$1.37] in place of Ascott Residence Trust (SGX:HMN) (but kept at ‘Buy’), given the former’s more defensive attributes (logistics portfolio with long WALE of 6.2 years). We keep Ascendas REIT (SGX:A17U) [BUY; FV: S$3.59], CapitaLand Mall Trust (SGX:C38U) [BUY; FV: S$2.90] and Suntec REIT (SGX:T82U) [BUY; FV: S$2.05] as our top picks. Within the small-mid cap space, we like ESR REIT (SGX:J91U) [BUY; FV: S$0.60].
  • We also have a preference for S-REITs over Singapore developers in the near-term given S-REITs’ more defensive positioning and less impact from the supply chain disruption from COVID-19.





OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-03-04
SGX Stock Analyst Report BUY MAINTAIN BUY 3.590 SAME 3.590
BUY MAINTAIN BUY 2.900 SAME 2.900
BUY MAINTAIN BUY 2.050 SAME 2.050
BUY MAINTAIN BUY 1.370 SAME 1.370
BUY MAINTAIN BUY 0.600 SAME 0.600



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