SINGAPORE: In a recent report on Thursday, Dec 14, analysts from DBS Group Research have indicated that “it is time for investors to invest in S-REITs, or invest more,” The Edge Singapore reports. The share prices of S-REITs have experienced a notable 7% rebound in November and December after a retreat in global benchmark 10-year yields.
The analysts, including Derek Tan, Rachel Tan, Dale Lai, and Geraldine Wong, suggest that with yields reaching their peak and likely to trend lower in FY2024, there is potential for further growth in yield-sensitive S-REITs. Investors are encouraged to take advantage of the still-attractive valuations, currently standing at 0.85x price-to-book value ratio (P/BV), along with widening yield spreads of approximately 3.9%, surpassing the 10-year mean of 3.3%.
Amid the recent rise in interest rates from 2HFY2022 to FY2023, causing a correction in asset prices globally, the DBS analysts reassure investors that concerns about balance sheet recapitalization via dilutive equity fund raisings are unlikely. Their sensitivity analysis indicates that around 90% of S-REITs are expected to remain within the Monetary Authority of Singapore’s (MAS) lower gearing limit of about 45%, even post-assumed cuts to book values.
The analysts highlight that S-REITs are currently trading at an attractive price-to-book ratio (P/B) of 0.87x, close to its below one standard deviation (s.d.) levels, suggesting that current valuations may already account for potential negatives.
Growth Prospects and Sector Picks
Despite dimmed growth prospects, particularly in light of high refinancing rates, the DBS analysts project a net property income (NPI) growth of approximately 4.4% compound annual growth rate (CAGR) from FY2024 to FY2025. This growth is anticipated to contribute to a distribution per unit (DPU) increase of around 2.0% CAGR, with several subsectors showing positive upside momentum.
The analysts express confidence in the hotel subsector, foreseeing its leadership based on robust revenue per available room (RevPAR) growth, coupled with contributions from completed refurbishments and acquisitions. They recommend a strategic focus on specific S-REITs, including retail ones like Frasers Centrepoint Trust (FCT) and Lendlease Global Commercial REIT (LREIT), commercial ones like Keppel REIT and Maple Pan Asia Commercial Trust (MPACT), and hospitality ones such as CapitaLand Ascott Trust (CLAS).
According to the DBS team, “We like industrial S-REITs, as 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 such as Fraser Logistics Commercial Trust (FLCT) and Mapletree Logistics Trust M44U -0.59% (MLT) and data-centres like Digital Core REIT.”
Outlook for Singapore’s Real Estate Market
Anticipating an improved economic growth of 2.2% in FY2024 for Singapore, following a tepid 0.9% growth in FY2023, the DBS team believes that the real estate market in Singapore is poised for growth and will continue on an upward trajectory. Projecting positive rental reversions for most real estate sectors, they estimate a net operating income (NOI) growth of around 4.4% over FY2024 to FY2025.
However, the climb in interest rates may impact positive NPI growth in various real estate sectors, with around 24% of debt set to expire in FY2024. The DBS team expects a potential up to 2.5% rise in overall interest costs due to differences in base rates. Despite this, they suggest that “The erosion of DPU will still be apparent, especially in 1HFY2024, although easing rates conditions could soften the impact as we progress through the year.”/TISG