“In our scenario analysis, based on an assumed three-year rolling refinancing profile, we estimate that refinancing rates could be close to 200 bps higher. However, the team writes that the spread-out debt maturity profile coupled with a high fixed-rate debt ratio of 75% would be a near-term shield, partially mitigating the overall cost of debt from an assumed 2.5% to 2.9%.
That said, the team expects to cut their distribution per unit (DPU) estimates for the FY2023 by 9.0% and shave close to 70 bps off the headline yield of 7.1% to a “still attractive” 6.5%.
At this point in time, even though the impact of interest rates stood larger than initially expected, the team believes that most of the risks have already been priced in, with around 60% of the stocks under the brokerage’s coverage trading at 2013 taper tantrum levels or at 10-year lows, in terms of yields.
“Even in our bear case scenario where sector yields spreads revert to historical mean, on our assumed revised estimates, we see no more than 7% drop from current levels, implying that investors should turn to be buyers than sellers at current levels,” the team writes.
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“In fact, our conversations with investors indicate that most are awaiting a turn in bond yields rather than further underweighting the sector,” it adds.
The way the DBS team sees it, investors looking for subsectors that can weather the effects of currency, interest rates and margin risks may consider the Singapore office and Singapore retail subsectors. “Given their substantial Singapore-focused footprint, they offer attractive entry points, especially when these stocks are already trading close to taper tantrum valuations,” the team writes.
