- SREITs seen as a “safe haven” when yield curve flattens (i.e., fear of recession)
- Acquisitions will be more targeted due to higher accretion hurdles, given higher funding costs
- Hospitality and office continue to shine despite market volatility; top picks are CICT, KREIT, ART, and CDLHT
- Stay with high-growth industrial and retail; top picks are FCT, LREIT, MINT, and FLT
Stars are still aligned for hospitality and office, despite market volatility. While the SREITs are not spared by the rising interest rate environment, it can still outperform in instances when the yield curve flattens (i.e., fear of recession sets in), which we will see in 2H22-2023. As such, despite the reopening plays having already done well YTD (+10%), we believe that the hospitality and office sectors will continue to shine on the back of improving fundamentals. Our top picks are CICT and KREIT for office plays, and ART and CDLHT for hospitality. For retail and industrial, we stay with picks with the strongest growth profile, which are FCT and LREIT for the retail sector and MINT and FLT for the industrial sector.
SREITs stepping up to reduce inflationary pressures from utility costs and interest rates. In the 1Q2022 results/update, we saw SREITs starting to refinance its near-term debt expiries, reducing to 11% and 17% in FY22 and FY23, respectively (largely industrial and hospitality). The hedged ratio increased to 77% vs. 75% as at end-2021, providing increased defence against rising interest costs. While utility costs are on the rise, we remain comforted that most SREITs are locked in with contracts ending from the latter half of 2022 onwards. This will impact industrial the least while retail may experience a lag before higher costs could be passed through.
Acquisitions likely to be selective and targeted moving forward. With cap rate spreads tightening as interest rates rise, we expect inorganic growth to turn challenging and acquisitions to be more selective and targeted moving forward. Most SREITs do not expect cap rates to widen in the near term and, if at all, will likely see it lagging interest rate movement. As such, SREITs could potentially turn to higher yield commercial assets or development projects in search of value-accretive acquisitions. Industrial players’ SREIT acquisition momentum will slow the most, save for those with sponsor support and pipelines.