Singapore REITs – Switch to the right REITs (OCBC)
Singapore REITs –
Switch to the right REITs
As our house advocated an OVERWEIGHT rating on the S-REIT sector throughout FY12, we saw the FTSE ST REIT index appreciate 22.7% YTD, versus the STI’s 15.7% gain, driven mostly by a flight to safety amidst macro uncertainties and a liquidity driven search for yield. At this juncture when we are seeing prices taking new heights and gaining updated visibility for subsector outlooks, we ask investors: Are you switching to the right REITs today? We present three key ideas for investors with REITs portfolios: 1) Move to office REITs from local retail REITs - prefer CCT [BUY, FV: S$1.53] over CMT [HOLD, FV: S$2.04], 2) Stay in industrial REITs for yield – top pick is CACHE [BUY, FV: S$1.18], 3) Hospitality outlook is intact but rotate to ART [BUY, FV: S$1.34] from CDLHT [HOLD, FV: S$2.06]. Other BUY rated REITs include FCT [FV: S$1.89], SGREIT [FV: S$0.79], MLT [FV: S$1.19], FCOT [FV: S$1.23] and CRCT [BUY, FV: S$1.70].
Switch to office REITs from local retail REITs – prefer CCT over CMT
Due to limited supply coming online and better than expected demand in 2Q12, office fundamentals are outstripping market expectations. Meanwhile, office REITs, trading at an attractive average 0.82x PB and forward yield of 6.4%, reported a healthy set of 2Q12 results in-line/surpassing consensus estimates. Upgrade office REITs to OVERWEIGHT. On the other hand, while the outlook for the local retail sector remains stable, we judge that most of the positives are already priced in at currently rich valuations. Downgrade local retail REITs to NEUTRAL. Our recommendation here: switch to CCT [BUY, FV: S$1.53] from CMT [HOLD, FV: S$2.04]. We also like FCOT [BUY, FV: S$1.23] for its growth potential, strong execution and attractive forward yield of 7.1%.
Good o’ industrial REITs - in uncertain times, CACHE is king
We believe growth drivers and financial positions of industrial REITs remain sound. Average current and forward DPU yields of 7.6-7.7% are still the highest among other REIT subsectors. Maintain OVERWEIGHT on the subsector. Our top pick here is CACHE [BUY, FV: S$1.18] for its sturdy portfolio, healthy financial position and attractive FY12F yield of 7.6%.
Hospitality story intact - rotate to ART from CDLHT
We see overall hotel room demand (6.4% pa) outstripping supply growth (3.7% pa) over 2012-15 and supporting RevPAR at current high occupancies of 80%-90%. Maintain OVERWEIGHT on hospitality REITs. We advocate rotating from CDLHT [HOLD, FV: S$2.06] to ART [BUY, FV: S$1.34] which looks overly punished for its European exposure and for its attractive 7.5% forward yield.
Overseas retail REITs can boost returns – CRCT is preferred
Maintain OVERWEIGHT on overseas retail REITs. Our previous top pick FRT has appreciated significantly YTD, with its acquisition of two properties and good 1H12 results serving as price catalysts. However, based on valuations, we are now switching our preference to CRCT [BUY, FV: S$1.70], which has strong fundamentals and deserves a premium for being the only pure-play mainland China retail REIT.
Healthcare REITs looks expensive – avoid for now
While prospects of healthcare REITs remain intact, valuations appear expensive. Based on consensus estimates, healthcare REITs are trading at 1.27x P/B and forward yields of 6.3% versus S-REITs average of 0.96x P/B and 6.9%. We see limited upside ahead; downgrade subsector to NEUTRAL.