Singapore REITs Monthly - Phillip Securities 2024-04-15: Waiting For Interest Rate Cuts

• The S-REITs Index performance was lukewarm in March after the FOMC held rates steady at 5.25-5.5%. It gained 0.6%, following the 5.1% decline in February. The top performer for the month was Manulife US REIT (SGX:BTOU) – it gained 40% but is still down 3.8% year-to-date. The worst performer was Daiwa House Logistics Trust (SGX:DHLU), a drop of 7.8% after the Bank of Japan raised interest rates to 0-0.1%, ending its eight-year period of negative interest rates.
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• S-REITs share price are now trading at a forward dividend yield spread of ~3.2% (-1.3x standard deviation) and a P/NAV of 0.88x (-1.7x standard deviation).
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Sector Round-Up

• The Fed kept federal funds rate unchanged at 5.25-5.5% for the fifth straight meeting on 20 March, resulting in the S-REITs Index’s lukewarm share price performance. The Fed remains on track to cut interest rates this year but will need to see more positive signs that inflation will move towards its 2% target.
• With lower interest rates, S-REITs will experience
  1. lower financing costs,
  2. higher dividend yield spreads over bonds, and
  3. higher property valuations as cap rates compress.
• Furthermore, with interest rates peaking, we expect deal-making to return in full swing. Therefore, we expect a sector recovery in 2024-2025.
• We recently initiated Cromwell European REIT (SGX:CWBU) with a BUY recommendation and a target price of €1.91. We like Cromwell European REIT for the following reasons:
  1. it has a resilient portfolio with high portfolio occupancy (FY23: 94.3%) and rental reversions (FY23: 5.7%);
  2. it has a commendable divestment track record since FY22, and another ~€160mil of divestments in the pipeline to keep capital management in check; and
  3. most of its leases have annual rental escalation clauses that are based on the y-o-y increase in CPI.
• See report: Cromwell European REIT - Asset Rejuvenation Strategy To Drive Organic Growth.

Retail sector

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Darren Chan Phillip Securities Research | Liu Miaomiao Phillip Securities | https://www.stocksbnb.com/ 2024-04-15 SGinvestors.io

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