In their Aug 26 report, the analysts are “increasingly constructive” on S-REITs given the tailwinds such as the declining Singapore overnight rate average (Sora), which have rekindled acquisition activity, further aided by a pick-up in equity fundraising. The Sora is currently at around 1.5% with funding costs at between 2.3% to 2.8%. S-REITs have raised about $2.4 billion so far.
DPU growth expected in 2HFY2025
In 2HFY2025, the analysts expect the sector to report stronger distributions per unit (DPUs), boosted by continued positive rental reversions and lower interest rates.
Among the sub-sectors, retail S-REITs’ prospects still look good, thanks partly to the government-given vouchers.
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Industrial S-REITs, in particular logistics and data centres, are also likely to do well given the positive rental uplifts seen in the 1HFY2025 despite a moderation from supply spikes.
Office S-REITs was a “key surprise” with overall reversions above the analysts’ expectations at the +10% region due to the dwindling supply of Grade A offices.
Hotel S-REITs should also see an improving outlook after a “weak” first half of the year, although booking visibility remains weak, the analysts note.
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To this end, about half of the S-REITs sector are now reporting h-o-h growth in distributable income, outpacing net property income (NPI) growth, indicating a growing boost from the falling interest rates.
“We note that [the] sector’s average interest cost has dipped [by] 10 basis points q-o-q, now 25 basis points off the peak in 3Q2024, with further reductions anticipated,” the analysts write.
In the second half of the year, the analysts prefer retail S-REITs, followed by industrial, office and hotels.
Keeping in mind their overall valuations and growth potential, they have named CapitaLand Integrated Commercial Trust (CICT), Frasers Centrepoint Trust (FCT), Mapletree Pan Asia Commercial Trust (MPACT), Mapletree Logistics Trust (MLT), Keppel REIT and Parkway Life REIT.
At the same time, the analysts also see alpha opportunities in mid-cap S-REITs given the heightened interest on the back of the Monetary Authority of Singapore’s (MAS) Equity Development Programme (EQDP).
Mid-cap REITs under the bank’s coverage are Lendlease Global Commercial REIT (LREIT), Elite UK REIT and ESR REIT, which offer yields ranging between 6.5% to 9.0%.
The analysts have “buy” calls for all the REITs mentioned here. They have target prices of $2.50, $2.75, $1.50, $1.55, $1.10 and $4.75 for CICT, FCT, MPACT, MLT, Keppel REIT and Parkway Life REIT respectively.
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The analysts also have target prices of 75 cents, 40 pence (69 cents) and $3.20 for LREIT, Elite UK REIT and ESR REIT respectively.
Units in CICT and FCT closed at $2.28 and $2.33 on Aug 29 respectively, while units in MPACT, MLT, Keppel REIT and Parkway Life REIT closed at $1.38, $1.22, 97.5 cents and $4.22 respectively.
Units in LREIT, Elite UK REIT and ESR REIT closed at 60 cents, 35 pence and $2.74 respectively.
