REITs had a stellar performance in 2017. The REITs sector returned 21 percent year-on-year. Despite the strong performance in 2017, RHB believes that the sector still offers among the highest absolute yields compared to the global REITs sector. RHB notes that the strong economic pick-up should boost underlying demand and continue to support REITs.
Focus On Growth Drivers
With a strong pick-up in economic activities in Singapore, the underlying demand for REITs should also pick up. Thus, RHB recommends investors to focus on REITs that are likely to benefit from the economic pick-up and deliver growth. RHB also recommends REITs that have made accretive acquisitions that are expected to deliver inorganic growth from the uptick in demand.
Hospitality REITs: On The Cusp Of Multi-Year Growth
Singapore’s hotel revenue per available room (RevPAR) has been on a gradual decline since 2012. While occupancy has been steady throughout the years, room rates have taken a hit due to the increased competition from new hotels. But moving forward, RHB notes that supply threats are diminishing, and demand is expected to pick up. Thus, hoteliers should regain some of the pricing power.
OUE Hospitality Trust is RHB’s top pick among hospitality REITs. OUE Hospitality Trust is a key beneficiary of the opening of Changi’s new airport terminal. It is also expected to ride on the sub-sector trend of rebounding RevPAR with hotel supply declining.
OUE Hospitality Trust: BUY, TP $0.91 (Current share price: $0.89)
Industrial REITs: Focus On Demand And Supply Factors
Demand-supply dynamics for business parks remain favourable as there is limited supply coming on stream in 2018. RHB expect rents to increase by 3-7 percent in 2018. For the factory and warehouse logistics segment, RHB expects rent to stay flattish in 2018 as outlook brightens in 2H18. Thus, among industrial REITs, RHB recommends REITs with exposure to the business parks and hi-tech industrial segment.
Ascendas REIT (A-REIT) is RHB’s top pick among industrial REITs due to its well-diversified industrial property exposure and efficient capital recycling strategy. On the other hand, Cache Logistics Trust is expected to be a late-cycle play on the turnaround in the logistics sector, as supply headwinds are likely to abate in 2H18.
A-REIT: BUY, TP $2.90 (Current share price: $2.77)
Office REITs: Favourable Dynamics But Price Not Right
According to RHB, grade-A office rents should increase by 5 to 10 percent in 2018 as demand picks up and supply slows down. Office REITs have already been the best performing sub-sector among REITs, having grown by 22 percent in 2017. As such, RHB believes that most of the positives have already been factored in the share price.
Among the office REITs listed in Singapore, Manulife US REIT is RHB’s top pick. Its pure-play office exposure to the rebounding US economy and office market are reasons for Manulife US REIT being chosen as RHB’s top pick.
Manulife US REIT: BUY, TP US$0.98 (Current share price: US$0.955)
Retail REITs: Challenging Outlook Remains
Overall demand and sentiment in the sector continue to remain weak, despite slight uptick in recent sales. The supply coming on stream amid relatively weak retail demand should continue to exert pressure on retail rents. Amidst the challenging environment, RHB recommends only well-positioned defensive sub-urban malls to register decent performance.
Frasers Centrepoint Trust is RHB’s recommendation for investors who are looking to gain exposure to the retail REITs segment. Frasers Centrepoint Trust has upside potential from recent asset enhancements, solid balance sheet and potential growth from acquisitions, which puts it as a leading retail REIT.
Frasers Centrepoint Trust: NEUTRAL, TP $2.29 (Current share price: $2.31)