SINGAPORE (Mar 6): OCBC Investment Research is maintaining its “neutral” stance on the Singapore REITs (S-REITs) sector with the conclusion of the 4QCY17 earnings season, which the research house deems to have offered “little surprises” as all 24 S-REITs under its coverage delivered results which met expectations.
In a Tuesday report, lead analyst Andy Wong recalls that OCBC has downgraded six S-REITs this earnings season on valuation grounds, while noting that the hospitality sector has fared the worst among its peers although retail delivered slightly positive growth.
“For hospitality, we are encouraged that some of the Singapore hotels and serviced residences have started to turn in positive RevPAR/RevPAU growth in 4QCY17. Retail landlords will have to continue to reposition their malls amid structural challenges, but the improvement in consumer confidence and Budget measures (one-off SG Bonus of $100-300 and GST hike implementation only from 2021 at the earliest) augurs well in the near-term,” comments Wong on the two S-REIT sub-sectors.
Exterior of Northpoint City in Yishun, which will have a combined net lettable area of more than 500,000 sq ft and over 400 retailers, once it is fully open. The mall, which integrates a new South Wing with the former Northpoint Shopping Centre (now known as the North Wing of the Northpoint City development), has been progressively opening since end-2017. The North Wing of the development falls under Frasers Centrepoint Trust's portfolio (Credit: Frasers Property)
Looking ahead, Wong foresees a more operationally buoyant outlook with the expected easing of supply pressures this year for most sub-sectors, and retains the positive view that office rentals in particular are likely to see the strongest recovery in rents in 2018.
Amid his cautious view on S-REITs, the analyst has narrowed his top pick recommendations to three names to accumulate following the recent market pullback.
These are namely Frasers Logistics & Industrial Trust (FLT), Frasers Centrepoint Trust (FCT) and Mapletree Logistics Trust (MLT) – all of which have been rated “buy” at fair value estimates of $1.25, $2.49 and $1.48, respectively.
“The FTSE ST REIT Index (FSTREI) has declined 5.9% YTD, versus the STI’s 1.1% increase. Despite the correction, we do not find sector valuations attractive. The FSTREI is currently trading at a forward yield spread of 369 bps against the Singapore Government 10-year bond yield. This comes in at ~1.2 standard deviations below the 5-year average of 412 bps,” he notes.
This story, written by Michelle Zhu for The Edge Singapore, first appeared on March 6.