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S-Reits stand to gain this year as markets turn in their favour

S-Reits stand to gain this year as markets turn in their favour.

SINGAPORE-listed real estate investment trusts (S-Reits) could soon spring back to life spurred by more new listings and acquisitions amid dovish signals from the US Federal Reserve, global macro uncertainties and aversion to risky assets.

These factors in turn, could make it ripe for investors to take cover in S-Reits after the sector spent much of last year dampened by the rising interest rate environment, say experts.

Since Nov 28, when Fed Chairman Jerome Powell said interest rates were "just below" the range Fed officials consider neutral, the FTSE ST Reit Index has risen about 8 per cent to close at 839.65 last Friday.

A mid-February report by Philip Capital pointed out that S-Reits' sector yield spreads stood at 268 basis points over the benchmark 10-year Singapore Government Securities yield.

"We believe that the coast remains clear for S-Reits to outperform," DBS analysts wrote in a Feb 11 report, predicting further compression in the current forward yield spreads of 3.65 per cent.

As UOB Kay Hian analyst Jonathan Koh put it to Business Times: "When interest rates have peaked and maybe potentially can go down, investors will gravitate towards investing in bonds or any asset classes when cash flow is assured... the same distributions Reits give you become more attractive."

DBS chief investment officer Hou Wey Fook said in a note: "2019 is expected to be a year of elevated volatility amid prevailing geopolitical and policy uncertainties. This will be beneficial to safe-haven assets like S-Reits, which display close correlation with the S&P 500 implied volatility."

But it's not only global factors, said RHB's Vijay Natarajan. He pointed to tightening supply in the office, hospitality and industrial sector here as reasons to be rosy about Reits.

How could the potential turn in interest rate environment filter down to the Reits' earnings and distribution per unit (DPU) performance?

Maybank Kim Eng analyst Chua Su Tye said given that the interest rate environment is starting to look benign, analysts will probably have to reduce their assumptions on borrowing costs, which could lift DPU.

Analysts have mostly priced in about 30 to 50 basis points increase in the floating rate component for borrowings the Reits may have, he said.

This could also catalyse several initial public offerings (IPOs) in the pipeline.

"(Potential) IPOs might take advantage of this window given the demand in the market," said Mr Natarajan.

Some new offerings waiting in the wings include a new Reit by Keppel and KBS of various US prime office properties, and US investment firm Urban Commons' hotel portfolio.

Kelvin Teo, UBS portfolio manager and analyst for global emerging markets and Asia Pacific equities, said: "At current valuation and with the strong demand for yield instruments, we would expect more capital issuance from S-Reits."

The lower borrowing costs also augur well for S-Reits which plan to undertake asset acquisitions.

Overseas assets for S-Reits have risen to 5-82 per cent of AUM (assets under management) and are expected to grow further, said Mr Chua in a Jan 17 report.

"(For) Reits with higher debt headroom and those that have made some acquisitions in Europe or UK, I think we can see some more activity this year," he said.

He is bullish on counters in the industrial and hospitality sectors, including Ascendas Reit and CDL Hospitality Trust.

UOB Kay Hian is positive on the recovery and tightening in the office and recovery in hospitality sector, and likes defensive sectors like healthcare, naming Parkway Life Reit.

RHB likes Reits in the hospitality sector such as CDL Hospitality Trust, saying the sector has bottomed out, as well as Ascendas Reit, ESR-Reit, and Manulife US Reit for their US exposure.

Mr Natarajan advises that investors remain picky on S-Reits as macro uncertainties are at play: "If the outlook in the conditions change quite drastically, typically those Reits with a better asset quality, a good management track record... and with a more diversified play, tend to be more robust."

UBS' Mr Teo said the bank's top picks are Reits with higher-dividend growth prospects, cautioning nevertheless that if weak macro conditions persist, rental growth could come off, making Reits more vulnerable.

He also warned that there may be some tendency for Reits to take on more debt when the rate cycle becomes more accomodative - which could be an added worry for investors.

Source: https://www.businesstimes.com.sg/real-estate/s-reits-stand-to-gain-this-year-as-markets-turn-in-their-favour?utm_source=emarsys&utm_medium=email&utm_campaign=BT_Breakfast_Brief&utm_term=S-Reits+stand+to+gain+this+year+as+markets+turn+in+their+favour&utm_content=25%2F02%2F2019

´╗┐Adapted from The Business Times 25 February 2019