DBS: S-REITs will continue to be net outperformers in 2024

SINGAPORE: Singapore Real Estate Investment Trusts (S-REITs) marked a robust end to 2023, witnessing a 9.1% surge in December, a noteworthy 15% climb from their lows in October the previous year.

Analysts Geraldine Wong and Derek Tan from DBS Group Research anticipate that S-REITs will continue to be net outperformers in 2024 as interest rates continue their downward trajectory, The Edge Singapore reports.

In their Jan 2 report, Wong and Tan wrote, “After the rebound in prices, S-REITs’ FY2024 yields have compressed to [around] 6.5%, implying a spread of [an estimated] 3.9% against the 10-year yields.”

Despite the positive outlook, analysts caution that S-REITs are approaching “overbought” territory in the near term, which is evident in the combined 15% rise in the Singapore REITs index.

This surge follows the market’s belief that the US Federal Reserve has concluded its interest rate hikes, mirroring a playbook observed in 2018 to 1H2019 when S-REIT and developers’ stocks rebounded by 20% over a six-month period.

Wong and Tan anticipate potential near-term profit-taking due to the recent price surge.

In 2023, industrial S-REITs were the star performers, but Wong and Tan suggest a shift towards other subsectors for outperformance in 2024.

They argue that in the current cycle, “value” will surpass “safety,” leading to increased allocations in retail S-REITs like Frasers Centrepoint Trust (FCT) and Lendlease Global Commercial REIT (LREIT), commercial S-REITs such as Keppel REIT (KREIT) and Mapletree Pan Asia Commercial Trust (MPACT), and hospitality S-REITs like CapitaLand Ascott Trust (CLAS).

These sectors currently trade close to -1 standard deviation (s.d.) in Price/Book Value (P/BV) and yield terms. Among the subsectors, retail, office, hotels, and industrials are preferred in that order.

Wong and Tan maintain their positive stance on the overall financial health of the S-REIT sector. They note, “We still like industrial S-REITs, though valuations are less attractive on relative terms and will likely ‘market perform’.

Despite this, we remain firmly vested in multi-year secular trends of logistics (Frasers Logistics & Commercial Trust or FLCT, MLT) and data centres (Digital Core REIT).”

They anticipate that the upcoming valuation exercises in January and April will affirm their belief that approximately 90% or more of S-REITs will maintain gearing below the “market comfortable” level of 45%.

The analysts suggest that subsectors facing the most significant impact on share prices due to uncertainty around book values will likely experience more room for growth in the coming months./TISG