Singapore REITs - The Time Is NOW
- Singapore’s real estate sector to grow modestly as economy enters a soft patch.
- S-REITs have ample defenses against sustained interest rates hikes till the tide turns in late 2023.
- Re-opening story “not dead”, many beneficiaries from re-opening of China’s economy and borders.
- S-REIT yield spread of ~3.0% has priced in interest rates risk; selective picks with a preference for resilience and balance sheet strength.
Singapore economy to enter a soft patch; real estate sector to see slowing growth momentum.
- Singapore’s economy is expected to slow to ~2.2% in 2023, averting a recession while inflation is expected to remain sticky at ~6.3%. With this backdrop, DBS economist expects more cautious business and consumer sentiment. Thus, we believe Singapore’s real estate cycle will enter a more modest growth phase, but we still project most sectors to see market rents remaining on an uptrend in 2023.
S-REITs to navigate interest rates and currency headwinds well.
- While we project overall net property income (NPI) growth of ~5.0% over FY22-24F, we see more flattish DPU growth rates of ~3.0% (-0.5% if we exclude hospitality S-REITs), mainly due to the impact of higher refinancing rates and forex losses for selected S-REITs.
- That said, we see ample defenses from S-REITs’ high fixed-rate debt ratio and forward currency hedges until interest rates turn in S-REITs favour, which could be sometime in late 2023-2024.
Re-opening story is “not dead”.
- The potential re-opening of China is an overall positive for investor sentiment and has many pluses for S-REITs. The reopening should help to improve disruptions to supply chains (positive for industrial, manufacturing) and potential increase in consumer spending (picks: Mapletree Pan Asia Commercial Trust (SGX:N2IU), CapitaLand China Trust (SGX:AU8U)).
- That said, the “holy grail” will come from the eventual outbound travel of China tourists which will provide a further boost to the hospitality sector (pick: CapitaLand Ascott Trust (SGX:HMN)) in the medium term.
- See also report: Office REITs - DBS Research 2022-12-14: A Year Of Two Halves.
FED ends hikes by 1Q23, major overhang to be lifted.
- We see a more conducive environment for S-REITs as the FED potentially slows and ends its hikes by 1Q23. The 10-year US and SG yields have declined from their respective peaks in anticipation of cooling inflation and economic outlook, and these are projected to be ~3.5% and 3.0% in 2023 respectively.
- S-REIT yield of 6.1% or a spread of 3.1% is fair and has substantially priced in the interest rate risks, in our view. We believe that the focus will then be on the impact of a recession, and as such, suburban retail (Frasers Centrepoint Trust (SGX:J69U), Lendlease REIT (SGX:JYEU), CapitaLand Integrated Commercial Trust (SGX:C38U)) and industrial names (CapitaLand Ascendas REIT (SGX:A17U), Frasers Logistics & Commercial Trust (SGX:BUOU), CapitaLand India Trust (SGX:CY6U)) offer better DPU apacity for upside surprises.
- Continue to read the 20-page report attached below for complete analysis on Singapore REIT sector.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Rachel TAN DBS Group Research | Derek TAN DBS Research | Dale LAI DBS Research | https://www.dbs.com/insightsdirect/ 2022-12-15 2022-12-15
More views on outlook of Singapore REIT (S-REIT) sector:
Analyst Reports on Singapore REIT Sector