Wednesday, February 19, 2014

Singapore REITs: Fundamentally sound, but risks ahead (OCBC)

Singapore REITs:
Fundamentally sound, but risks ahead

-Expecting risks and challenges
-Better positioned for impact
- Remain selective on S-REITs

Expected US stimulus reduction loomed large on prospects
The recent respite in the unit prices of SREITs resulting from the delay in the US Fed tapering was short-lived. After the US Central Bank surprised the market with its decision not to scale back its bond purchase programme on 18 Sep 2013, the FTSE ST REIT Index recovered 3.8% to reach a high of 750.27 on 30 Oct, outperforming the 1.6% growth in STI over the same period. However, in the weeks that follow, the SREITs sector started to lose ground again, as talks on the potential QE reduction (as early as Dec) resurfaced amid stronger-thanexpected US economic data. Looking ahead, we believe mounting risks from an impending reduction in bond purchases will continue to spook interest-rate sensitive stocks such as S-REITs, leading to a potential share overhang or even further downward pressure from here.

Fundamentals remain sound
Nevertheless, we note that S-REITs are now fundamentally stronger, as they have been capitalizing on the low interest rate environment to embark on asset enhancement works to rejuvenate their assets and acquire quality assets. For FY14, we still expect the S-REITs under our coverage to register a robust DPU growth of 6.2% on average, hence enhancing the sector yield. In addition, S-REITs have been very prudent on their capital management, in anticipation of the potential rise in interest rates spurred by the QE taper. For example, most S-REITs have actively refinanced their borrowings over a longer term, thereby extending their debt maturities and lowering their financing costs. More importantly, a major portion of their existing borrowings have been locked into fixed rates through the issuance of fixed-rate notes or interest rate swaps. This is expected to limit the impact of rising interest rates on the S-REITs’ DPUs over FY14-15 in our view.

Slightly more compelling following price correction
In addition, the yield spread between the SREITs sector and Singapore 10-year government bond yield – a proxy for attractiveness – has widened to 450bps from 425bps since 18 Sep, as the correction in SREITs’ unit prices more than offset the rise in the government bond yield. To-date, S-REITs remain the market with highest yield spread as compared to the other major geographies. Should there be further pull-back going forward, S-REITs may turn more compelling and prompt some investors looking for yield plays to re-visit the sector.

Retain NEUTRAL view on S-REITs sector
Given that S-REITs are better positioned, but not insulated, for the impending QE tapering and ensuing market volatility, we are keeping our NEUTRAL view on the S-REITs sector. Among the subsectors, we continue to favour only the domestic retail and office REIT subsectors, as the rental outlooks and valuations still look appealing. We also reiterate our focused selection process, preferring S-REITs with clear growth potential, strong financial position and compelling valuation. In this regard, we choose CapitaCommercial Trust [BUY, S$1.61 FV], Starhill Global REIT [BUY, S$0.95 FV] and Suntec REIT [BUY, S$1.90 FV] as our top picks.

Publish date: 13/02/14

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高估期间, 卖对, 不卖也对, 买是错的。
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