Hiking On Growth
Upping office, staying with industrial
We stay constructive on S-REITs post-FY21, with evidence of broad-based DPU recovery, underpinned by resilient occupancies, and improving leasing momentum. We see the earnings outlook strengthening amid firmer macro fundamentals and re-opening efforts. With absence of rental waivers, rising rents from business normalisation, and contributions from acquisitions, we expect DPUs to accelerate by +12% YoY in FY22. The sector remains under-owned, in our view, as risks of higher interest rates have kept investors on the sidelines. We prefer office REITs and large-cap industrial names with new economy exposure. Our top picks are AREIT, CICT, MINT, and SUN, as they are expected to deliver higher total return potential with 5.5-6.0% dividend yield, and 4.5-5.5% DPU CAGR.
Office landlords to gain from tight supply
The office sector saw a short-lived downcycle and is recovering on stronger-than-expected demand, led by tech occupier expansion, a ‘flight-to-quality and an easing of work-from-home mandates. With supply
constrained, pricing power has returned to office landlords. We forecast rents to rise 12% through 2023 and see a more active physical market and increasing inorganic growth opportunities for REITs, especially as cost of capital improves. We lift DPU estimates for KREIT and SUN by 2-3% and increase our TPs by 14-16% on stronger rental growth for Singapore office assets, and lower cost of equity assumptions. We raise SUN to BUY from HOLD based on its leverage to Singapore’s reopening.
Industrial rents bottoming out, entrenching further in new economy
We remain positive on structural growth for industrial REITs, given rising contributions from their overseas properties, and AUM growth underpinned by concentration in new economy segments. Valuations have pulled back as investors rotated towards recovery plays, with the large-cap names now yielding 5.0-6.0%. Having scaled up acquisitions, industrial REITs remain well-placed to capitalise on compressing cap rates and rising asset values. We expect to see acceleration of recycling plans supplementing inorganic growth initiatives. We see catalysts from accretive acquisitions, and strengthening rents, led by logistics, and business park space.
Interest rate outlook key risk, with mitigation
S-REITs have underperformed and are now 7% below Nov 2021 peaks, but with short-term bond yields rising in anticipation of rate hikes, we see lower risk of further yield curve steepening ahead. With the sector yield spread of 3.7% 1 SD above their 5-year historical average, we think higher rates are largely priced in. The interest rate outlook remains a key risk, but we see DPUs cushioned by strong balance sheets, while our sensitivities suggest limited downside to estimates and TPs