Jovi Ho Wed, May 25, 2022
Singapore REITs (SREITs) are seen as a safe haven when the yield curve flattens in a rising interest rate environment. Even amid market volatility, “the stars are aligned” for hospitality and office sectors, say DBS Group Research analysts Rachel Tan and Dale Lai.
“While the SREITs are not spared by the rising interest rate environment, it can still outperform in instances when the yield curve flattens, which we will see in 2H2022-2023. As such, despite the reopening plays having already done well YTD at 10%, we believe that the hospitality and office sectors will continue to shine on the back of improving fundamentals,” write the analysts on May 20.
Tan and Lai’s top picks are CapitaLand Integrated Commercial Trust (CICT) and Keppel REIT (KREIT) for office plays, and Ascott Residence Trust (ART) and CDL Hospitality Trusts (CDLHT) for hospitality.
For retail and industrial, they prefer REITs with the “strongest growth profile”, namely Frasers Centrepoint Trust (FCT) and Lendlease Global Commercial REIT (LREIT) for the retail sector and Mapletree Industrial Trust (MINT) and Frasers Logistics & Commercial Trust (FLT) for the industrial sector.
Tan and Lai write: “For the rest of the year 2022, we believe the office and hospitality sectors will continue to shine, given expected tailwinds in the respective sectors. The office sector continues to see positive catalysts in both demand and supply.”
They add: “The office sector has seen strong demand from both tenant expansions and new demand from regional relocations to Singapore, which offset a potential downsizing due to the adoption of the hybrid working model. The lack of quality new supply in core CBD will drive rents up on the back of strong demand with vacancy likely to trend below 4%.”
SREITs square up with inflation
SREITs are stepping up to reduce inflationary pressures from utility costs and interest rates, say Tan and Lai.
In the 1QFY2022 results and updates, Tan and Lai saw SREITs starting to refinance their near-term debt expiries, reducing to 11% and 17% in FY2022 and FY2023 respectively, largely in the industrial and hospitality sectors.
The hedged ratio increased to 77% from 75% as at end-2021, which the analysts believe provides 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,” they add.
Acquisitions are likely to be selective and targeted moving forward, say DBS. “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, say Tan and Lai, 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.”