Singapore REITs - DBS Research 2022-12-02: Time To Relook At S-REITs

Singapore REITs - DBS Research | SGinvestors.io Singapore REITs

Singapore REITs - Time To Relook At S-REITs

  • Rebound in Nov 22 marks a possible turn in the S-REITs, as Fed hints of slower hikes starting in Dec 22; 10-year yields dip from recent highs.
  • Overhang lifted for the S-REITs, as Fed nears the end of its current rate hike cycle, possibly by 1Q23.
  • News emerging of a relaxation of the tight grip of China’s zero COVID-19 a source of optimism.

A strong rebound for S-REITs share prices in Nov 22

  • There was a strong rebound in share prices in Nov 22, given a cooler-than-expected inflation print in Oct 22 that fuelled a rebound in S-REIT prices for the month. The FSTREI index rose by ~5.3%, closely following the 6.4% rise in the Straits Times Index (STI). The developers, measured by the FSTREH index, led the recovery, rising by ~10.8%.
  • In terms of subsectors for the S-REITs, the rebound was primarily led by
    • office S-REITs (+7.7%),
    • industrial S-REITs (large cap: +4.5%, mid-cap:+5.4%), and
    • US office REITs (+4.6%).
  • Meanwhile, China-focused S-REITs were mainly flat, increasing by ~1.8%.
  • We note that the large caps, namely CapitaLand China Trust (SGX:AU8U) (+16.5%) and Sasseur REIT (SGX:CRPU) (+9.9%), led the recovery, which was offset by a dip in other small-cap S-REITs.
  • Leading the rebound within the industrial S-REIT space is Digital Core REIT (SGX:DCRU) (+22%) and Daiwa House Logistics Trust (SGX:DHLU) (+16%), mainly due to attractive valuations after close to a ~35%-40% decline in share prices year to date (YTD).

What does Dec 22 bring?

  • Fed to moderate pace of hikes in Dec 22. Federal Reserve (Fed) Chair Jeremy Powell has given clear hints of a slowdown in future rate hikes in as early as Dec 22. Markets are pricing in a 50 basis point increase. DBS economists expect the final target rate to be 5.0% and a majority of the hikes to be frontloaded and end by the first quarter of 2023 (latest by the first half of 2023).
  • We believe that the slowdown and eventual pause in hikes would support the share prices for S-REITs in the first half of 2023. In response to the recently weaker inflation data and Fed remarks, we saw the US 10-year and SG 10-year yields declining from a recent peak of ~4.0% and 3.5% in the middle of November 2022 to end the month at ~3.5% and 3.1%, respectively.
  • Datapoints from China to remain key. The most recent datapoints coming out of China are encouraging, in our view. Media articles appear to indicate a softening stance by the China Government for its zero COVID-19 policy in the coming months, which will be a positive.
  • DBS economists’ view is that a relaxation will be gradual, and there is no doubt that it will be an overall positive for investor sentiment and also have positive implications on the currently disrupted supply chains (industrial, manufacturing) and potential consumer spending (China-focused retail plays). That said, the “holy grail” will come from the eventual resumption of outbound travel of China tourists, which will be a further boost to the hospitality sector in the medium term.

Yield spreads have widened.

  • S-REIT share prices are trading at a FY23F yield of 6.1%, and the fall in 10-year bond yields to 3.1% brings yield spreads back to 3.0%, which we believe to be fair for the sector.
  • Key drivers to watch for in the upcoming months will come from better-than-expected operational results/margins, driving upside surprises to DPU growth profiles.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | Rachel TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-12-07