Despite the backdrop of interest rate hike cycle from the Fed, S-REITs managed to make a good year-to-date run. The total return of S-REITs was 24.9 percent year-to-date, according to CIMB. The sector’s strong performance was due to the narrowing of yield and yield spread.
Moving forward, CIMB believes that S-REITs will continue to be well-hedged against the rising interest rate environment as most of their debts are on fixed rates. The average debt maturity profile is about three years, which provides good visibility on potential credit cost pressures.
Withdrawal Of Easy Monetary Policies From Central Banks
CIMB notes that the market will continue to witness the withdrawal of easy monetary policy from central banks across the globe. This will be through both the interest rate and Quantitative Easing mechanisms as the US Federal Reserve, European Central Bank (ECB) and Bank of Japan (BoJ) are likely to continue the recalibration of their monetary policies.
Investors Takeaway: CIMB’s Recommended REIT Sub-Sectors And Top REIT Picks
Top Sub-Sector Pick: Office REITs
As we head into 2018, we are slowly moving past the wall of new supply that entered the market in the past two to three years. Office rents have also shown early signs of recovery and started to improve in 3Q17. CIMB projects office rentals to rise by 5 to 10 percent in 2018 to close the negative reversion spreads.
CIMB believes that the improvement is likely to be led by the core central business district area. This is because new supply is drying up (until 2021) and new builds are now largely pre-committed. Among the laggards in the Office REIT sub-sector, CIMB’s preferred pick is Keppel REIT.
Led by Chinese tourists, tourist arrivals to Singapore remains healthy in 2017. Looking ahead, CIMB notes that tourist arrivals growth momentum should sustain in 2018, and is projecting an increase of three percent in tourist growth.
From the supply perspective of hospitality rooms, new supply is expected to taper off in 2018 as new hotel rooms turn fully operational in 2018. Overall, CIMB foresees revenue per available room (RevPAR) to register five percent growth in 2018.
Far East Hospitality Trust is CIMB’s preferred pick in the sub-sector due to its laggard valuation against hospitality peers. CIMB highlights that there is potential upside to earnings should the earnings accretive acquisition of Oasia Hotel Downtown occur.
Third Place: Industrial REITs
Inorganic growth is the key driver for industrial REITs in 2018. If industrial REITs are able to continue to acquire assets both in Singapore and overseas at attractive rates, distribution per unit (DPU) growth would be decent.
CIMB points out that new supply of factory space will moderate in 2018, as the market digests the excess industrial space. Thus, CIMB foresees negative growth in rents for multiple-user factory space and warehouses.
Given the patchy organic rental growth performance of industrial S-REITs, CIMB recommends those with inorganic growth prospects. Among the big-caps, A-REIT was identified as a relative laggard. Another industrial REIT that CIMB continues to favour is Frasers Logistics Trust due to the favourable Australian industrials sub-sector dynamics and its ability to tap into its sponsor’s Australian development pipeline.