Monday, September 2, 2013

Singapore REITs What happens if interest rates go up? (HSBC)

Singapore REITs
What happens if interest rates go up?

Sector will likely struggle to perform in anticipation of interest rate up-cycle coupled with slower growth prospects
Be selective: our top picks are AREIT and FCT, both rated OW
We initiate coverage on KREIT at Neutral with a TP of SGD1.25

Recent correction not necessarily a buying opportunity. Despite the sector’s 18% decline since April, valuations are only back to their historical averages. Coupled with a lacklustre growth outlook and the spectre of rising interest rates, we expect the sector will continue to struggle to perform in the medium term. Against this backdrop, we recommend being selective and picking REITs that have strong balance sheet metrics, a good management track record, reasonable valuations and decent growth prospects. Our top picks among Singapore REITs are AREIT and FCT, both rated OW.

Who would be the most affected by an increase in interest rates? REITs with the highest gearing, shortest debt term to maturity, lowest average cost of debt and highest proportion of floating rate debt would be the most directly affected by an increase in interest rates. We estimate that a 100bp increase in interest rates would reduce Singapore REIT distributions by 5-14% over the longer term and a 100bp increase in cap rates would reduce Singapore REIT RNAVs by 15-38%. Based on an analysis of individual REITs’ balance sheets, we find that CT, AREIT and FCT are the best positioned to weather any interest rate increases, while SUN, MCT, MAGIC and KREIT are the worst positioned.

Initiating coverage on Keppel REIT (KREIT) at Neutral with a TP of SGD1.25. In this report, we initiate coverage of KREIT with a Neutral rating and a TP of SGD1.25. In our view, KREIT has the best quality office portfolio in the sector, but a weak Singapore office outlook and high gearing are negatives. As income support for various assets roll off over the next few years, we are likely to see pressure on DPU (we estimate a FY13-15e DPU CAGR of -6.1%). KREIT currently trades at a FY13e dividend yield of 6.7% and a P/NAV of 0.9.

Source/Extract/Excerpts/来源/转贴/摘录: HSBC-Research,
Publish date: 22/08/13

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