Singapore 2014 Outlook -Singapore REITs- Refocusing on growth (DBSV)

Singapore REITs
(Underweight)
Refocusing on growth

• REITs to see rising cost of capital a hurdle to pursue growth
• Prefer S-REITs with internal growth engines/lower leverage
• Top picks: CDL HT, Suntec REIT, CRCT and FCOT

S-REITs faced with rising cost of capital.
We interpret the FED’s decision to begin tapering its monthly bond-buying program and at the same time keeping short-term interest rates low as a signal that “taper” and “rate hikes” are not synonymous events. As such, the yield curve will continue to remain steep,
with rates on the longer-tenure 10 year bonds to remain elevated on expectations of rising inflation. This will mean that investors of S-REITs will likely require higher returns to compensate for thinning spreads against the 10 year bonds going into 2014. With S-REITs trading at a yield spread of 4.0% (vs 3.5% historical average), we believe that much of this risk has been priced in.

Delay of rate hike cycle a relief, risk of rising interest rates is minimised for now.
With shorter-term interest rates expected to remain low, S-REITs should see marginal changes in its refinancing activities. Any hikes in costs, if any, are expected to be marginal, with limited impact on distributions. In addition, as most S-REITs have pro-actively hedged up to 85% of their interest costs into fixed rates, risk on this front is further mitigated.

Growth to differentiate the winners; acquisitions to take a back seat.
We project distributions to grow by 5% in FY15F, driven largely from organic sources, supported by completing development activities. Acquisitions, once the main driver for distribution growth, are likely to remain selective as most S-REIT managers have highlighted (i) limited opportunities available in the market at the right price and (ii) diminishing returns due to thinning implied S-REIT yields and physical yields. We expect the market to turn more selective on acquisitions and S-REITs that require capital raisings in order to pursue growth might find it tougher to raise funds, given rising cost of capital.

S-REITs are not identical; stick to growth.
Despite an overhang on share prices due to expected rotation from yield-sensitive sectors like S-REITs, we believe that market should not take a broad brushed approach towards S-REITs but focus on underlying fundamentals. Our picks remain SREITs with superior growth or are in sectors leveraged to economic growth. CDL HT, Suntec REIT, CRCT and FCOT are our picks.

Outlook
Much needed certainty from FED tapering decision.
The start of the withdrawal of FED’s monthly stimulus is likely to result in higher long term interest rates. This will mean that investors of S-REITs are likely to require higher rates of returns (i.e higher yields to compensate for thinning spreads against the 10 year bond), which could result in a cap in share price re-rating potential for the sector in the medium term.

Delay of rate hike cycle is a relief.
At the same time the FED’s decision to hold its short term rates low throughout 2014 will be a relief to S-REITs as refinancing activities are likely to remain stable and any hikes in rates to be marginal, with limited impact on distributions. In addition, most S-REIT managers have pro-actively hedged up to 85% of their interest costs into fixed rates, hence further reducing risks on this front.

Growth of 5% in FY14F, acquisitions to be selective.
We project distributions to grow by 5% in FY14F, driven largely from organic sources. Opportunities for portfolio expansion are likely to remain limited as most S-REIT managers have highlighted the unwillingness to acquire as seller’s expectations are understood to be still bullish.

Risks
Rising cost of capital .
We believe that the greatest obstacle that SREITs face will be rising cost of capital, given the sector’s reliance on both debt and equity markets to support its growth initiatives. We expect the market to turn more selective on acquisitions and S-REITs that require capital raisings in order to pursue growth may find it tougher to raise funds.

Earlier than expected rate hike.
Stronger than expected economic numbers for the US could mean that tapering may end faster resulting in rate hikes, which will negatively impact interest costs for S-REITs.

Valuation & Stock Picks
Trading at 1.02x P/BV, FY14F yield of 6.5%.
The FSTREI index has headed lower by 11% since the start of the year, bringing FY14F yields back up to 6.5% (yield spread of 4.0% against the 10 year government bond), with the sector trading at a weighted average P/Bk NAV of 1.02x

Growth picks.
Despite an overhang from expected rotation of liquidity from yield-sensitive sectors like S-REITs, the market should not take a broad brushed approach but focus on underlying fundamentals. Our picks remain S-REITs with superior/growth or in sectors leverage to economic growth. CDL HT, Suntec REIT, CRCT and FCOT are our picks.

Source/Extract/Excerpts/来源/转贴/摘录: DBSV-Research,
Publish date: 03/01/13