Singapore REITs - UOB Kay Hian 2021-09-24: Defensive Posture To Weather Fluctuation In Interest Rates

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Singapore REITs - Defensive Posture To Weather Fluctuation In Interest Rates

  • The Fed has set stringent conditions to be fulfilled before commencing hikes in the Fed Funds Rates, which implies a time gap between QE taper and interest rate hikes. We estimate that every 0.1ppt increase in costs of debts will reduce DPU by 0.6-1.9%. S-REITs with high interest coverage ratios and long average maturity of debts are better able to cope with higher interest rates.
  • Maintain OVERWEIGHT.



Decoupling of QE taper and interest rate hikes.

  • The Fed is scheduled to commence QE taper in Nov 21. Many investors assumed that QE taper would stretch into 1H22, followed by hikes in the Fed Funds Rate in 2H22. According to Fed governor Jerome Powell speaking at Jackson Hole Symposium on 27 Aug 21, QE taper “does not carry a direct signal regarding the timing of interest rate lift-off”. Thus, it is appropriate to infer that there would be a time gap between the two events.


Interest rate hikes subject to more onerous conditions.

  • Unlike QE taper, the Fed has formalised substantially more stringent conditions to be fulfilled before commencing hikes in the Fed Funds Rate. The economy is required to reach conditions consistent with maximum employment, where inflation has reached 2% and on track to moderately exceed 2% for some time. Jerome Powell assessed that there is much ground to be covered before these stringent conditions are met.


Sensitivity analysis.

  • Ceteris paribus (all other things being equal), we assessed the negative impact on DPU caused by a simulated increase in costs of debts of 0.1ppt. The negative impact ranges from 0.6-1.9%.
  • Suntec REIT (SGX:T82U)’s 2022 DPU is expected to drop by 1.9% due to low interest coverage ratio of 2.8x.
  • Far East Hospitality Trust (SGX:Q5T)’s 2022 DPU is expected to drop 1.7% as the hospitality industry would only benefit from a full-fledged recovery later in 2023.


Rise in costs of debts mostly contained during 2016-18.



Resiliency from high interest coverage ratio and long average maturity of debts.



S-REITs becoming more resilient.

  • S-REITs have scaled up due to industry consolidation and acquisitions locally and overseas. Their increased scale and diversification, geographically and by asset classes, improve their standing with bankers. Thus, S-REITs are able to garner support and obtain competitive interest rates from banks for their refinancing.
  • S-REITs are disciplined in capital management. Their aggregate leverage is well within the cap of 50% imposed by the Monetary Authority of Singapore.


Moving from pandemic to endemic.

  • Singapore is experiencing an exponential surge in daily cases of COVID-19 infections, which hit 1,504 on 23 Sep 21. Thankfully, ICU admission and deaths remain low. In the last 28 days, 98% of new cases are asymptomatic or have mild symptoms. Starting 14 Sep 21, Singaporeans who took their second dose of the COVID-19 vaccine in 1Q21 can make appointments for booster shots. Seniors aged 60 and above will also be given booster shots.


Maintain OVERWEIGHT on Singapore REITs.


Sector Catalysts

  • 82% of Singapore’s population has completed their full regimen and received two doses of COVID-19 vaccines, which paves the way for the easing of safe distancing measures, normalisation of economic activities and an eventual pick-up in GDP growth.
  • Limited new supply for the office, logistics and retail segments in 2021.


Sector Risk

  • A prolonged wave of COVID-19 Delta variant infections.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-09-24
SGX Stock Analyst Report BUY MAINTAIN BUY 1.010 SAME 1.010
BUY MAINTAIN BUY 1.020 SAME 1.020
BUY MAINTAIN BUY 1.790 SAME 1.790
BUY MAINTAIN BUY 3.630 SAME 3.630
BUY MAINTAIN BUY 3.060 SAME 3.060



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