Amidst the widespread sell-offs in global equities including the Singapore blue chips, S-REITs showed resilience. High yields, along with a retreating interest rate outlook, gave investors a compelling reason to remain invested. As the trade war between the US and China escalates up a notch, central banks around the world (from the US to EU and China) have been shifting to more accommodative policies to sustain the shaky economic environment.
Relative to other major bourses, S-REITs are amongst the highest yield, making them even more attractive. Given this backdrop, here are three S-REITs to go long on in spite of the weak outlook.
Within the industrial space, the market seemed to have consolidated and both demand and supply are now more supportive. While still susceptible to global downturn, industrial REITs with high-specs business parks in their portfolio, are better positioned to ride out the headwinds.
Add in the merit of having a diversified customer base with some 1300 plus tenants and we see why Ascendas REIT (AREIT) is amongst the top pick. With an estimated 6.4 percent exposure to the electronics sub-sector which is undergoing a slump, the impact on AREIT is also somewhat limited.
That said, at the share price of $3.07, AREIT is offering a yield of 4.5 percent, at 39 percent premium to its book value. Though not entirely cheap per se, the market may be pricing in its stability into its valuation.
Frasers Centrepoint Trust
Similar to industrial sub-sector, tapering supply could also cushion retail space. That said, given the slower macro outlook, Frasers Centrepoint Trust’s (FCT) portfolio of well-connected, suburban malls will be supported by less cyclical necessity or non-discretionary demand.
Due to this characteristic, FCT’s occupancy rate continued to recover in the latest 3Q19 to 96.8 percent – a level not seen since 2Q15. FCT also achieved positive rental reversions during 9M19, with an average increase of 4.7% over the expiring leases despite the challenging retail environment.
Meanwhile, the Trust recently acquired one-third interest of Punggol Waterway Point. Strategically located beside Punggol MRT, the mall is also the only full fledged mall in the housing estate. As such, we will be looking forward to see how the latest acquisition would alleviate FCT’s growth profile in the coming quarters.
At the unit price of $2.70, FCT offers a comparable yield to AREIT, at 4.7 percent. However, it is still priced at a lower price-to-book value multiple of 1.26 times.
Manulife US REIT
In the office sub-sector, our preferred pick would be Manulife US REIT, simply given the fact that the US economy is still churning and that the US Dollar is weaker now. Singapore, on the other hand, is seeing a progressively slowing economy which could be detrimental to many office REITs with portfolio concentrating in the local grade A office space.
Given its relative high-yield, long weighted average lease expiry profile of 6.2 years and high occupancy rate of 97.2 percent in 1H19, Manulife US REIT provides the sort of stability that investors are searching for now.
During the latest quarter, Manulife US REIT also saw improvements in its balance sheet, reducing its gearing to 37.1 percent while improving its average debt maturity from 2.3 years to 3.1 years. This further gives the REIT more headroom to hunt for inorganic growth.
Trading at US$0.895, Manulife US REIT offers a compelling yield of 6.8 percent, at a lower P/B multiple of 1.11 times.
If volatility continues, we expect REITs to outperform the market on a relative basis. However, with valuations at the level they are, it would be hard to see a repeated performance in S-REITs, given their stellar run in 1H19. That said, the three above-mentioned REITs have more defensive characteristics for investors looking for yield and stability amidst this period of uncertainty.