Since late May 2013 when fears of global interest rate tightening spooked capital markets worldwide, the S-REITs sector has collapsed by over 20%, underperforming the wider FSSTI index (down by 10%). We think the selldown has overly discounted both the macro and REITspecific fundamentals, hence we believe it is an opportune time to buy ahead of consensus upgrades. Maintain BUYs on Keppel-REIT, AIMS AMP, Cambridge and Cache Logistics.
¨ The SREITs under our coverage are currently trading at 6.5% FY14F DPU yields, with almost 3.5% spread over Singapore’s 10-year bond yield (historical average 4.6%). This is on the back of a 20% correction in the SREITs since May, against the wider FSSTI index which retraced by only 10%.
¨ Our fixed income team forecasts only a 66bps rise in US’ 10-year bond yield over the next 12 months, which is expected to push up Singapore rates, with +17bps for 2-year government bond yield and +55bps for 10-year yield by end-2014F. We estimate 3-5% earnings impact on the S-REITs, assuming a 100bps rise in financing costs, which will more than fully account for the rate hikes projected by our fixed income team.
¨ Current valuations suggest that the commercial office and industrial sectors are the most attractive in our view, given the low forward supply stock vis-à-vis the mid-cycle demand, which will continue to underpin a positive upcycle rental reversion. New office supply is expected outpace historical average demand, with new industrial supply through 2016F having reached 71% pre-commitment.
¨ We remain lacklustre on the hospitality REITs with new supply coming onstream (5.9% CAGR until 2015F) and the recent foreign worker riots, which could arrest visitor arrivals (historical growth of 6.7%). However, its low valuations offer limited downside risks at this juncture. In the absence of strong tourism arrivals, suburban malls are expected to outperform prime retail malls, as Singapore’s retail space per capita is still among the lowest in developed Asia-Pacific.
Publish date: 23/12/13