Singapore REITs - Adjusting to the new normal (DBSV)
• S-REITs to face rising cost of capital
• Prefer S-REITs with organic growth due to fewer acquisition opportunities
• BUY Suntec, CDREIT, CRCT, FCT and FCOT
S-REITs faced with rising cost of capital
We interpret theFED’s decision to begin tapering its monthly bond-buying programand at the same time keeping short-term interest rates low as asignal that “taper” and “rate hikes” are not synonymous events.As such, the yield curve will continue to remain steep, with rateson the longer-tenure 10-year bonds to remain elevated onexpectations of rising inflation.
This will mean that investors of SREITswill likely to require higher returns to compensate forthinning spreads against the 10- year bonds in 2014. However,with S-REITs trading at a yield spread of 4.0% (vs 3.5% historicalaverage), we believe that much of this risk has been priced in.
Delay of rate hike cycle a relief, risks of rising interest rate isminimised for now
With FED intention to keep shorter-terminterest rates low throughout 2014, S-REITs should only seemarginal changes in their refinancing activities, with limited impactto distributions. In addition, as most S-REITs have pro-activelyhedged up to 85% of their interest costs into fixed rates, risks onthis front is further mitigated.
Organic growth potential to differentiate the winners;acquisitions to take a back seat
We project distributions togrow by 5% in FY15F, driven largely from organic sources,supported by completing development activities. Acquisitions,once a main driver for distribution growth, are likely to remainselective as most S-REIT managers have highlighted (i) limitedopportunities available in the market at the right price and (ii)diminishing returns due to thinning implied S-REIT yields andphysical yields. We expect the market to turn more selective onacquisitions and S-REITs that require capital raisings in order topursue growth might find it tougher to raise funds, given risingcost of capital.
S-REITs are not identical; stick to growth. Despite an overhangon share prices due to expected rotation from yield-sensitivesectors like S-REITs, we believe that the market should not take abroad brushed approach but instead focus on underlyingfundamentals. Our picks remain S-REITs with superior growth orwith exposure in sectors leveraged to economic growth. CDL HT,Suntec REIT, CRCT, FCT and FCOT are our picks.
Publish date: 02/01/14