Three Singapore REITs to ‘buy’ in a slower growth environment

SINGAPORE (Jan 12): HSBC Global Research expects to see a “relatively uneventful reporting period” as Singapore REITs (S-REITs) gear up to report their financial results for the quarter ended December 2016 over the coming weeks.

Nonetheless, the research house is remaining constructive on S-REITs on the expectations of 10-year US Treasury bond yields declining to 1.35% by end-2017.

“Sector distribution per unit (DPU) yield is 6.2% with spread over 10-year SG bond yield at c380bps. The 10-year SG bond yield is 2.45% and in our view, the S-REIT sector is pricing in a 10-year SG bond yield of c2.9-3.0% based on DPU yields and spreads,” observes Pratik Burman Ray, a senior property analyst at HSBC, in a Wednesday report.

The analyst notes that focus areas for the key REIT sub-sectors are, as such: “For office REITs: leasing activity, sources of demand for office space and reversions achieved; for retail REITs: tenant sales, shopper traffic, occupancy costs, reversions and shifts in operating margins; and for industrial: conversion of single-user space to multi-user, together with broader issues around occupancy and declines in asset valuations.”

“For hospitality, expectations are low, and investor focus would likely remain on signs of a pickup in corporate demand, forward bookings, as well as any guidance on 2017 RevPAR growth,” he adds.

HSBC hence prefers defensive names in the sector, given incremental concerns around demand in a slower growth environment which would impact economically sensitive sectors more.

“On that basis, industrial, office and hospitality are at greater risk and retail relatively defensive,” says Ray.  

Under these circumstances, the research house recommends Mapletree Commercial Trust (MCT), Frasers Centrepoint Trust (FCT) and CapitaLand Mall Trust (CMT) as its preferred ideas. While MCT and FCT remain at “buy” with target prices of S$1.75 (RM5.46) and S$2.30 respectively, CMT has been upgraded from “hold” to “buy” with a target price of S$2.25.

As at 4:20pm, units of MCT, FCT and CMT are trading at S$1.46, S$1.99 and S$1.55 respectively. — theedgemarkets.com.sg