Singapore REITs

Kim Eng on 2 June 2014

• A slower-than-expected hike in interest rates bodes well for S-REITs whose share prices have rebounded.
• We see room for further re-rating as sector yields are expected to compress to 5.6-5.7% from 6.0% currently.
• In view of this, we upgrade our sector call to NEUTRAL with CMT, CCT and AREIT being our top picks, in sequence of preference.

Interest rate expectations trimmed
Following the change of winds in the macro environment, we cut our year-end risk-free rate assumption from 3.0% to 2.5% and expect a more prolonged low interest rate environment. This lends supports to our view that physical property valuation will hold up better than we initially expected. We therefore revise our assumptions for physical property price change from -2% to -10% to +2% to -6% in 2014. With yield compression cycle at play again, we expect S-REITs to return in favour.

Sector raised to NEUTRAL; top picks: CMT, CCT, AREIT Unlike recent past event that straddled from early 2012 until May 2013, we expect current yield compression cycle to be more modest. Our view is premised on: 1) current risk-free rates are unlikely to decline significantly as QE tapering gets underway, and 2) there are pockets of property price weakness. We expect sector yields to compress to 5.6-5.7% from 6.0% presently, translating to a yield-spread of 3.1-3.2%.

In view of this, we upgrade our sector call to NEUTRAL. TPs for our coverage universe are raised after factoring in lower risk-free rate, while leaving our DPU forecasts unchanged. Retail sub-sector remains our preferred segment, followed by office and hospitality. The industrial REITs remain the most at risk of NAV depreciation. For exposure, we recommend CMT, CCT, and AREIT, in sequence of preference.