• FED normalisation a near-term overhang for S-REITs
  • Higher-than-average yield spreads and strong 8.0% CAGR support valuations as investors pick growth 
  • Domestic reopening a focus theme despite Omicron risk with selected “new economy” plays presenting robust growth prospects 
  • Watch out for and address interest rate and inflation risks 

Fed normalisation and rate hikes a possible headwind but S-REITs’ wider-than-average spreads imply that returns can remain positive. The uncertainty of the timing and pace of FED hikes in 2022 will likely be an overhang for the S-REITs’ share prices in 1H22. Using the 2013-2015 taper period as a guide, S-REIT prices lagged the Straits Times Index (STI) before outperforming strongly upon the start of rate hikes in December 2015 with this uncertainty removed. We see a possible repeat of such trends in 2022 but acknowledge the key compelling differences for S-REITs to do better this time round. This comes on the back of a (i) wider-than-average FY22 yield spreads of c.4.2% vs c.4% back in 2013-2016, (ii) accelerating 2-year CAGR in DPUs over FY22-23F of 8.0% (vs just 2.0% in FY14-15F) which we believe support valuations and we advocate an accumulate-upon-weakness strategy. As the outlook remains unclear in the immediate term, we believe that investors should stay vested alongside selected “domestic reopening” plays and S-REITs with a “new economy” focus for their stronger growth profiles.  

Reopening beneficiaries for 2022 remain in focus.  While the emergence of Omicron viral strain is a setback for Singapore’s reopening plans, we do not see domestic clampdown as a base-case scenario (for now) though we are seeing caution from governments as cross-border reopening takes a back seat in the near term. As such, with the Singapore economy still strong, we see stronger domestic retail sales driving a c.5-6% rise in DPUs for retail and selected commercial S-REITs (prefer FCTLREITCICTSUN) while construction delays are pushing back office supply completions to 2023/24, implying that rentals are likely to remain firm. We like plays such as ART  for its globally diversifed portfolio which will lead peers in a recovery.  

Investors to stick to “new economy” secular theme for strong growth potential. We continue to see robust organic growth prospects for logistics, and strategic M&A activities for data centres in 2022. We prefer FLCT, MINT, CLCT for their robust 2-year DPU CAGR of c.5%-9%. Given the tight compression in asset yields, we see these REITs embarking on more development, AEI opportunities to modernise and drive higher DPU and NAV returns. 

Addressing risks. (i) Margin erosion given persistent inflationary impact on costs, and (ii) interest costs eroding distribution growth.