Looking towards a recovery
? After a robust FY21, SREITs are projected to deliver DPU growth of 6-7% in FY22F and 3% in FY23F.
? Improving operating metrics and inorganic growth should underpin DPU expansion, in our view.
? Reiterate sector Overweight. Our preferred picks are CICT and AREIT. We also like EREIT for its attractive valuation.
SREITs impacted by rising interest rate outlook…
We think SREITs’ underperformance YTD has priced in c.50bp of interest rate hikes. While we think the market will remain choppy in the near term over uncertainty over the quantum of rate hikes and the elevated inflation outlook, we think this has been partly reflected in share prices. Anecdotal evidence shows that performance of SREITs tends to be choppy as the market digests the expectations of rate hikes. However, SREITs’ performance tends to catch up, when the hikes begin, as tapering signals an improving economic outlook, which should boost the rental and capital value outlook in the medium term.
…despite improving outlook on operating metrics
In the recent results update, retail and industrial REITs showed slight qoq improvements in rental reversions and we expect the recovery to continue at a moderate pace as borders reopen and on robust economic activity. On occupancies, industrial REITs saw portfolio take-up rates inching up qoq while retail REITs’ take-up rates generally stayed stable. Occupancy for office REITs was dragged by some frictional vacancies but landlords remained confident about backfilling the vacated spaces in 2022F amid single-digit positive rental reversions. While elevated inflation could mean a rise in operating costs, inorganic growth prospects could provide another growth driver for SREITs.
Projected DPU growth of 6-7% in FY22F and 3% in FY23F
We expect SREIT sector DPU to grow by 6-7% in FY22F and another 3% in FY23F, therefore eroding some of the impact of yield spread compression due to rising rates. We do not believe the impact of rising rates will have a significant impact on earnings and valuations. By our estimates, a 0.1% pt rise in average cost of borrowings and cost of equity could impact SREITs’ DPU by 0.2-1.9% and DDM-based valuations by 1.4-3%.
Reiterate sector Overweight
We stay sector Overweight on SREITs. We update our sector top picks to CICT, AREIT and EREIT as a small cap pick. CICT is trading at 5.2% FY22F dividend yield, which is a 390bp spread over the Singapore 10-year bond yield (and above the average 5-year/10- year bond yield spread), with DPU growth of 6.2%. Potential re-rating catalysts include accretive new acquisitions. We also like AREIT and EREIT on valuation grounds. AREIT is trading at 5.8% FY22F dividend yield or at 380bp yield spread, higher than its 5-year/10- year yield spread average while EREIT is trading at 7% FY22F yield. Upside risks for the SREIT sector include moderated pace of rate hikes while downside risks include higher-than-anticipated rate hikes and an elevated cost inflation outlook.