REITs have traditionally been a mainstay in Singaporeans’ investment portfolio. However, with interest rates now rising, interest in REITs seem to have waned. However, DBS thinks that there are four good reasons why you should be investing in REITs at this point in time.
S-REITs Aren’t Bonds, So Stop Pricing Them As One
Investors and the market have been taking a cautious stance towards REITs due to rising interest rates and expensive valuations over the last five years. However, DBS opines that both investors and the market have been misreading drivers of REIT prices. After all, REITs are not straight out bonds and the impact of rising interest rates is mitigated by an expected upturn in rent rates.
DBS notes that investors are incorrectly perceiving S-REITs as a straight forward bond-type (or fixed income-type) investment and thus, assessing valuations with inappropriate time periods. While acknowledging that current yields and yield spreads at their 5-year lows (a warning indicator of potential recession), DBS notes that excess supply, falling rents and sluggish business environments are a problem of the past.
Positive Macro Outlook For REITs
Moving forward, the REIT sector is heading towards a period of easing supply pressure, a more buoyant economy and rising rents. As such, DBS believes that investors should reassess S-REITs’ against their longer historical track record, and against the backdrop of a multi-year upturn in the Singapore property market.
Slew Of Value-Added Acquisitions Over The Past 6 Months
Over the past six months, S-REITs have announced 20 acquisition deals worth some $5 billion. Ascendas India Trust, Far East Hospitality Trust, Keppel DC REIT, Mapletree Logistics Trust and Manulife US REIT have all deepened their presence in their existing core markets. The most notable deals include Frasers Commercial Trust, Mapletree North Asia Commercial Trust, Frasers Logistics Trust and CapitaLand Commercial Trust’s maiden expansion into the UK, Netherlands, Japan and Germany.
Inorganic Growth Strategy Underappreciated By The Market
According to DBS, the market has underappreciated S-REITs inorganic growth strategy. The acquisition deals not only help offset the impact of rising interest rates, but also speeds up the expected improvement in distribution per unit (DPU) growth. DBS notes that a strong DPU outlook going forward will help to drive share prices and sustain them.
Apart from driving DPU growth, the acquisitions will also improve the quality of the earnings stream through enhancing the resilience and diversification of S-REITs. Moreover, the addition of freehold properties via overseas acquisitions also protects against the downside risk of NAV dilution as the properties in Singapore approach the end of their leasehold life in the medium term.
Investors Takeaway: Office, Hospitality REITs Are DBS’ Preferred Investments
Given expectations that the office and hotel sectors should see the strongest pick-up in rents/room rates over the coming year on easing supply pressures, DBS believes that now is an opportune time to pick up selected names in these two sectors.
Among the office and hospitality REITs, DBS’ top picks are CapitaLand Commercial Trust, Suntec REIT and CDL Hospitality Trusts. DBS also notes that Frasers Centrepoint Trust’s strong near-term DPU growth is worth taking a look.
CapitaLand Commercial Trust: BUY, TP $2.10
Suntec REIT: BUY, TP $2.30
CDL Hospitality Trusts: $2.00
Frasers Centrepoint Trust: BUY, TP $2.45
A-REIT: BUY, TP $3.00
Mapletree Logistics Trust: BUY, TP $1.48