S-REITs - Not the time to bottom-fish yet
Not the time to bottom-fish yet. The S-REITs sector has been a laggard in 2013 (-7.8% price return YTD), underperforming the STI by 6.4%. This is in stark contrast to its stellar performance in 2012 when the sector recorded a 41% price return and outperformed the STI by 20%. S-REITs currently trade at FY13F yields of 6.5% and FY14F yields of 6.7%, below their historical average of 7.0%. While the yields may seem attractive, we think it is too early to revisit the sector given the impending QE taper.
Entry point pegged at 7% yield. We would recommend investors to reconsider S-REITs when the sector average DPU yields touch 7% and above. This is pegged to a historical yield spread of 395bps and longer-term risk-free rate of 3.0-3.5% (currently 2.5%), and would imply further price downside of at least 8% for the whole sector.
Downgrade Industrial and Retail REITs. We are downgrading Industrial REITs to UNDERWEIGHT as asset prices have the most room to fall, given how much they have escalated over the past four years (+115%-153%) post GFC. We also downgrade Retail REITs to NEUTRAL given slowing consumption and most of the eligible malls in the REITs portfolio have already undergone asset enhancements, providing little boost to distributions.
Maintain UNDERWEIGHT. As a higher cost of borrowing and a lower asset value are being factored in, we revised our TPs across the board with the exception for CCT and KREIT. We raised our TPs for CCT and KREIT on higher office rental assumption (from our earlier conservative levels). On a segmental basis, our order of preference is retail REITs, followed by office, hospitality and then industrial. Our top pick is Suntec REIT which has forecasted DPU growth of 17.8% from 2013-2015, largely from the makeover of Suntec City, whereas other REITs have relatively underwhelming growth. We have a SELL on CACHE and MLT and a HOLD on A-REIT. Downside risk to our sector call stems from a prolonged delay in QE tapering, which will continue to stagnate the S-REITs market.
Publish date: 06/12/13