S-REIT

OCBC on 18 Jul 2012

With the onset of heightening concerns in the Eurozone and fears of slowdown in the macroeconomic activity in early Apr, defensive plays, particularly the S-REITs, have emerged as outperformers. In the second half of 2012, we believe S-REITs will retain their shine as investors continue to incorporate them into their portfolios. In general, S-REITs appear to be on track to post a relatively sturdy set of results, underpinned by healthy operating metrics, improved yields from asset enhancement initiatives and inorganic growth. We are reiterating our OVERWEIGHT view on the S-REIT sector, as most of the REITs have a positive outlook. We continue to favour the industrial, retail, hospitality and healthcare REITs. We are currently NEUTRAL on the office REITs. Among the subsectors, we like S-REITs with strong financial positions, robust portfolios, strong track records and growth potential. In this respect, we choose CACHE [BUY, FV: S$1.18], CDLHT [BUY, FV: S$2.04], and FRT [BUY, FV: HK$5.22] as our top picks for the sector.

S-REIT sector has proven its resilience
With the onset of heightening concerns in the Eurozone and fears of slowdown in the macroeconomic activity in early Apr, defensive plays, particularly the S-REITs, have emerged as outperformers. Year-to-date, we note that the FTSE ST REIT Index has climbed by a respectable 20.1% as a result of burgeoning interest by investors seeking shelter in safe havens. This far surpasses the benchmark index return of 13.2% over the same period.

Good performance likely to continue
In the second half of 2012, we believe S-REITs will retain their shine as investors continue to incorporate them into their portfolios, either for diversification or yield optimization purposes. In general, S-REITs appear to be on track to post a relatively sturdy set of results, underpinned by healthy operating metrics and improved yields from asset enhancement initiatives. While the S-REIT sector is currently trading at parity to its book value, the sector average current DPU yield remains attractive at 6.6%, in our view. In addition, the current low interest rate environment is expected to persist and should stay conducive for S-REITs to grow inorganically via acquisitions.

CACHE, CDLHT and FRT are our sector top picks
We are reiterating our OVERWEIGHT view on the S-REIT sector, as most of the REITs have a positive outlook. We continue to favour the industrial, retail, hospitality and healthcare REITs. We are currently NEUTRAL on the office REITs. Among the subsectors, we like S-REITs with strong financial positions, robust portfolios, strong track records and growth potential. In this respect, we choose CACHE [BUY, FV: S$1.18], CDLHT [BUY, FV: S$2.04], and FRT [BUY, FV: HK$5.22] as our top picks for the sector.