A more patient FED is a positive for S-REITs. With attractive yields and the upcoming index reviews to bring more visibility to the sector, we see an opportunity to re-enter.
Group Research – Equities 30 Aug 2021
A more patient FED is conducive for S-REITs to re-rate with rate hike still a while away
- Upcoming index reviews in Sept’21 to be a net positive …
- … for the overall S-REITs visibility in the international arena
- Growth momentum to accelerate in 2H21 as Singapore economy re-opens
- FY22F yield spreads of 4.5% attractive at more than – 1 standard deviation of its historical mean
A more “patient” FED is conducive for S-REITs. We see positives from FED chair Jeremy Powell’s broad messaging that the US Central Bank will “stay the course” rather than “be early” in its expected taper program in 2H21. Fed is taking a balanced view between recovery in the US economy and rising risks from the Delta variant. Taking the cue from the last rate hike normalization in 2H13-2018, a 1.5-year difference between “taper signal” to the first rate hike will imply the first hike will likely be in 2023. We see sufficient buffer for S-REITs to find its ground post-pandemic before addressing interest rate risks, and thus recommend investors to take the recent share price weakness to add. S-REITs FY21/22F yields are attractive at 5.5%/6.0%, implying that yield spreads against the SG 10-year bond are close to -1 SD at 4.0%- 4.5%.
Turnaround in sentiment to boost S-REITs prices; index review update for EPRA NAREIT to bring more visibility for the sector. It has been a mixed performance between large cap S-REITs and mid-cap S-REITs in the past 2 months with the larger cap peers under-performing in anticipation of SEA Limited’s (SEA US) increased weightage in MSCI Singapore Index. Meanwhile, selected mid-cap S-REITs have attracted incremental inflows due to possible inclusion into EPRA NAREIT Developed Asia (ENDA) Index come Sept’21 review. We expect the overall sector to build its base from now on. In addition, the wider representation of Singapore in major property indices (especially ENDA) will boost visibility for S-REITs on the back of more fund flows in the sector.
Re-iterate growth names as economic growth normalises. We remain optimistic that the S-REITs can continue to ride on the gradual re-opening of the Singapore economy and maintain our view on robust earnings growth projections in 2H21-2022 to drive a re-rating for the S-REITs. We prefer selected retail and office S-REITs (Mapletree Commercial Trust, Suntec REIT, Frasers Centrepoint Trust, Lendlease Global Commercial REIT) and industrial S-REITs for its robust growth trajectories (Mapletree Logistics Trust, Mapletree Industrial Trust, Frasers Logistics and Commercial Trust, ARA LOGOS Logistics Trust and ESR-REIT). Amongst hotels, we prefer global diversified names like CDL Hospitality Trusts.