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S-REITs to generate yields despite economic weakness
The occupancy level of new malls, such as Funan, is expected to be stable.
S-REITs to generate yields despite economic weakness
The average yields of S-REITs have bounced back to around 5.5%, despite seeing a 6.5% decline in prices early in the year, according to DBS Group Research. This figure implies a spread of over 4% against the Singapore 10-year bond yields.
“The broad-based sell-off in S-REITs of up to 4-5% in a day is certainty noteworthy,” said Derek Tan, an analyst at DBS Group Research. “We see [this] as an opportunity to accumulate S-REITs on expectations that the low interest environment and high headline yields will attract investor interest back to S-REITs after the market stabilises.”
The report stated that their preference includes industrial S-REITs because of their longer weighted lease expiry (WALE) supporting distributions. Office REITs, including US office REITs, are also attractive as their potential acquisitions may drive distributions higher.
As for hospitality REITs, the report cited Ascott Residence Trust (ART) and Far East Hospitality Trust (FEHT) as having high fixed rents (up to 70% of revenues) which limited the current downside risks. ART and FEHT were projected to deliver yields of up to 4.7% and 4.9%, respectively.
“In the medium term, we believe S-REITs will continue to be an important and relevant component of investors’ portfolio, especially given the sector’s increasing representation in major indices (current and future) such as the MSCI, STI, and the EPRA Nareit Developed World Index. Coupled with high yields of 5.5%, investors will eventually be drawn back into the S-REITs sector,” Tan added.
Healthy margins
S-REIT investors need not worry about the possibility of facing margin calls as well, as large-cap stocks are finding greater demand, despite the lower absolute yield. The average leverage ratios have also been conservative.
Investors, especially those having a larger concentration of non-institutional holdings, have been anxious about the prospect of margin calls. As some of these holdings may be leveraged, the market sell-off in March, 2020 may still spark a steep drop in prices when these investors liquidate their holdings.
Worried investors may have been zeroing in on smaller-cap S-REITs and possibly EUR/USD-based S-REITs, Tan also noted. Most industrial REITS have less than 1% of their portfolio revenues exposed to oil and gas firms, suffering from a significant fall in oil prices in March, 2020, whilst office S-REITs’ portfolios are exposed to the sector by between 4% and 8%.
DBS believes that the risk of a prolonged oil war may tighten profitability and cash flows for these firms in the future. “Whilst we do not anticipate mass weakness across the oil & gas sector, the exposure is noteworthy,” Tan said.
The panic over the fall in oil prices further clouded an already volatile outlook for S-REITs. Whilst the 50-bp FED rate cut brought a short-term respite to the sector, with FED funds rate at 1% to 1.25%, there is little room left to move down if the economy weakens further.
However, S-REITs’ yield spreads are expected to remain wide, which would keep incremental flows into the sector and valuations stable at current levels.
Retail REITs may stabilise
Despite expectations that retail REITs would be amongst the worst-hit in the Source: DBS Group Research
