Investors who are looking to invest in Real Estate Investment Trusts to increase their passive income, especially so when one is looking forward to retirement and wants to ensure a steady inflow of income to sustain themselves. Investors should take a look at these three REITs in different sectors with improving prospects.
- OUE Hospitality Trust (OUEHT)
OUEHT has been experiencing a correction in share price in March due to concerns over the issuance of exchangeable bonds by OUEHT’s sponsor; this has led to the stock to underperform the STI and other S-REITs.
However, analysts at RHB are still confident of the prospects of the trust given that demand for hotel rooms remains healthy, especially so due to rising passenger traffic arriving at Changi Airport. Hence, investors can look at the selloff as a good opportunity to enter the market by buying the stock at an attractive price.
The sell-off was sparked by fears of dilution for investors when OUE Ltd, the sponsor of OUEHT, recently announced to issue exchangeable bonds worth $150 million with 3 percent coupon per annum. These bonds can be exchanged for OUEHT shares at $0.957 per unit.
It is important to note however, that the issuance of the exchangeable bond will not dilute OUEHT’s distribution per unit and net asset value as it will only affect OUE Ltd’s holdings in OUEHT. If fully exercised, sponsor’s stake in OUEHT will be reduced to 29 percent from 37 percent.
In addition, OUEHT’s Mandarin Gallery has seen an increase in occupancy rate to 96.9 percent, a growth of 0.5 percentage point quarter on quarter. This is coupled with positive rent reversions, with a growth of 3 to 4 percent.
Due to recent selloff, the forward-looking dividend yield for FY18 is expected to be at 6.7 percent which is higher than the average 5.8 percent of S-REITs. Hence investors can still consider entering now to take advantage of the relatively low share price.
Overall RHB Invest has a Buy call on the stock with a target price of $0.95. OUEHT is currently trading at $0.815.
- SPH REIT
SPH REIT has seen a decrease in its revenue primarily due to negative rent reversion of 7.1 percent in Paragon for 20.5 percent of its net lettable area in the mall in the first half of 2018. This was coupled with a 2.5 percent decrease in renewal rates in Clementi Mall because of “a change in trade mix”.
In spite of the short-term pressure on the local retail landscape, Paragon has a high percentage of net lettable area that will only be due to be renewed in 2018 and 2019. Thankfully, due to improving retail sales sentiments in the market and positive economic environment, it is likely that rental reversion will begin to see some recovery in 2H18.
Considering that its gearing level is currently at 25.4 percent, the REIT has a vast financial headroom and hence the management can still afford to acquire other firms in Singapore and Australia to expand the REIT.
Overall, the performance of SPH REIT may improve with the positive economic environment and rising retail sales sentiments; however investors may choose to invest in other REITs that are offering more attractive yields than SPH REIT’s 5.6 percent.
CIMB Research has a Hold call on the stock with a target price of $1.06. Currently, SPH REIT is trading at $0.99.
- Frasers Commercial Trust
The recovery is well-underway in Singapore’s Core CBD office area due to a limited pipeline of new office space till 2020. It is likely that landlords will see increasing bargaining power.
Further, with economic growth forecast to be about 1.5 percent to 3.5 percent this year, demand for office space should see greater support. Grade B CDB offices should also see some increase in monthly rental rates, expected to increase by about 7.4 percent this year.
For Fraser Commercial Trust, improving demand-supply dynamics in Melbourne CBD office sector also bodes well for the office trust. Melbourne CBD’s vacancy rate is expected to reach “10-year low by mid-2018” to 4.1 percent, which drives up rental rates for the office property market to the benefit of Frasers Commercial Trust’s four leases that will be having mid-term lease rent reviews this year.
Overall, OCBC has upgraded Frasers Commercial Trust to a Buy with target price of $1.51. The REIT is trading at $1.44.