Singapore REITs: Down but not out
- Bruising month for S-REITs in Sept 22
- Valuations are flirting around multi-year lows and taper tantrum days (2013) offer attractive re-entry points
- Tighter yield spreads of 3.1% can be maintained given the still robust growth outlook
- Time to relook at selected EU/US office S-REITs
Bruising month for S-REITs brings opportunities.Sept 22 was a bruising month for S-REITs, which were down by c.7.3%, underperforming the Straits Times Index (STI). The drop in share prices came largely on the back of persistent inflation in the US, resulting in the Fed delivering another huge 75bps hike in Sep 22 but also guiding that more is to come till “the job is done” in taming inflation. 10Y US and SG yields spike by more than 50bps within the month and now sit at multi-year highs of c.3.8% and 3.5%, respectively, and are approaching peaks, in our view.
Valuations are attractive; what catalysts are we anticipating? Valuations are more palatable, with P/B and yield now above the mean at c.0.98x and 6.6%, respectively. On an individual REIT basis, we found that S-REITs are flirting between the low levels seen between the “2013 taper tantrum days” and since 2010. We believe that the recent weakness is an opportunity to start dipping into the sector, with suburban retail S-REITs (FCT, LREIT) and selected office REITs (MPACT, KREIT) already reaching attractive re-entry levels. We also see value emerging for industrial S-REITs (MLT, MINT) whose yields are at a five-year high. Hospitality S-REITs (CDREIT, CLAS) are poised to deliver outstanding results, which we believe will surprise on the upside. With China potentially re-opening, there could be an opportunity to relook at
CLCT, given it is trading close to March 2020 lows, at c.9%.
Can spreads remain tight? Yield spreads appear compressed at c.3.1%, below its five-year mean. This is due to higher 10-year SG yields, which have hit 15-year highs. We note that spreads have compressed to <2.0% before in the 2006-2008 period, but operating conditions then were more buoyant. That said, we believe that the strong growth profiles of a 6.0% CAGR (highest in five years) supports the current yield spread of c.3.1%. With 10-year yields expected to head down in 2023 as inflation tapers, we expect this to be positive for the sector overall.
US office and EU-focused S-REIT bore the brunt of the selloff and are down c.26%-c.34% year to date. While the outlook remains clouded, yields for these REITs are attractive at >10%-13%, albeit at new lows. We believe this is an opportunity to look at selected REITs with a more stable earnings profile.
KORE and CROMWELLare potential names that investors should consider, in our view.