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16 November 2021

Singapore REITs SECTOR – Keeping our barbell strategy on sector positioning

The recently concluded 3Q/9M CY2021 earnings season was mixed from an operational standpoint, but there was mostly an improvement in financial metrics observed. For the 10 S-REITs under our coverage which reported DPU figures, nine met our expectations, only one missed and there were no beats. YoY DPU growth for these 10 S-REITs came in at 9.1% on a median basis, as there were still some elements of a low base effect.

We are now forecasting the S-REITs under our coverage to record a market cap-weighted DPU growth of 9.6% for the current financial year (FY21/22F depending on financial year end). Looking at the next financial year (FY22/23F), we forecast DPU growth of 8.1%.

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We previously concluded that a sudden and sharp spike in bond yields can cause an initial negative knee-jerk reaction in the share prices of S-REITs. We further delve into the impact on S-REITs’ performance against steepening yield curve scenarios. Whilst a steepening of the yield curve may typically be associated as a driver of negative share price performance of the S-REITs sector, our study of historical data showed that during the eight periods from 2004 to present day (as at 15 Nov 2021) when the Singapore yield curve (10Y-2Y) steepened by at least 50 bps, the FTSE Straits Times REIT Index (FSTREI) delivered positive share price performance (excluding dividend returns) in four instances and negative share price return on the other four periods. In our opinion, there are several factors that can affect the performance of the sector, such as economic growth outlook, geopolitical events and exogenous shocks such as the Covid-19 pandemic etc. The drivers and pace behind the yield curve steepening thus certainly matters.

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From a valuation standpoint, the forward yield spread of the FSTREI against the 10-year Singapore government bond yield is now 357 bps, or approximately one standard deviation below the 10-year average of 416 bps. In terms of sector positioning, we continue to recommend a barbell strategy. Our basket of reopening/recovery plays comprises mainly retail and hospitality REITs, namely Ascott Residence Trust [BUY; FV: SGD1.22], CapitaLand Integrated Commercial Trust (CICT SP) [BUY; FV: SGD2.53], Frasers Centrepoint Trust (FCT SP) [BUY; FV: SGD2.81] and Mapletree North Asia Commercial Trust (MAGIC SP) [BUY; FV: SGD1.15]. On the other hand, we would balance our reopening/recovery basket with REITs with more resilient and defensive income streams that are less susceptible to Covid-19 related restrictions. Names we like within this resilient/defensive basket are Ascendas REIT (AREIT SP) [BUY; FV: SGD3.83] and Mapletree Industrial Trust (MINT SP) [FV: SGD3.42]. We also add in Frasers Logistics & Commercial Trust (FLT SP) [FV: SGD1.71] following our recent fair value upgrade.    

·      3Q/9M CY2021 results largely in-line; forecasting DPU growth of 14.0% in FY21/22F and 7.8% in FY22/23F
·      Mixed share price performance of S-REITs sector during periods of Singapore yield curve steepening
·      Barbell approach on sector positioning: ART SP, CICT SP, FCT SP, MAGIC SP, AREIT SP, MINT SP and FLT SP