In addition, institutions turned net buyers for four out of five trading weeks between March 3 to April 4, marking a reversal of the outflows that the sector experienced for much of 2024.
Valuations for S-REITs “appear attractive” from both a historical price-to-book (P/B) and dividend yield perspective, says OCBC, but they warn that the path ahead “will not be without headwinds”.
“Despite the relatively defensive nature of S-REITs, we caution that they are not immune to a recessionary environment as corporates will cut back on travel budgets and expansionary plans while consolidating their office space requirements. At the same time, a reduction in consumer spending will impact the gross turnover rents of retail S-REITs,” they add.
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Despite inflation remaining sticky, the rising risks of a US and global recession have also driven a “meaningful pullback” in benchmark interest rates of countries and regions where S-REITs have larger exposures to, says OCBC, with the exception of Japan.
“In particular, the dip in interest costs has been steeper for Singapore and augurs well for the borrowing cost; hence the positive distribution per unit (DPU) outlook for S-REITs with sizeable exposure to Singapore assets,” they add.
However, OCBC analysts think the decline in their financing costs is “unlikely to be of the same magnitude” at the onset given that S-REITs have, on average, hedged 75% of their borrowings as at end-2024.
In order of preference, OCBC likes retail, followed by logistics and industrial — with data centres the preferred within this segment. OCBC then ranks office and hospitality as the least-preferred sub-sectors among S-REITs.
“From a bottom-up perspective, we prefer S-REITs that can exhibit DPU growth and are backed by strong sponsors, are in strong financial positions and have healthy weighted average lease expiry (WALE) terms, and ideally some Singapore asset exposure,” they add.
OCBC’s top picks are CapitaLand Ascendas REIT (CLAR) with a $3.30 fair value estimate, CapitaLand Integrated Commercial Trust (CICT) with a $2.35 target price, Keppel DC REIT (KDCREIT) with a $2.43 price target and Parkway Life REIT (PLIFE) with a $4.60 fair value estimate.
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The Singapore 10-year Government Bond yield has eased to 2.47% as at April 7, compared to 2.86% at the start of the year.
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Coupled with the negative impact on financial markets from the US’s tariff announcements, the distribution yield spread of the iEdge S-REIT Index stood at 431 basis points (bps), which is 0.8 standard deviations above the eight-year average of 386 bps.
“If we look at more recent trends, the distribution yield spread is significantly above the three-year average of 346 bps. Meanwhile, from a P/B perspective, the iEdge S-REIT Index is trading at a forward multiple of 0.80 times as at April 7. This represents a steep discount to its historical trading band, coming in at 1.9 standard deviations below the eight-year average of 0.98 times,” says OCBC.
CLAR, CICT, KDCREIT and PLIFE closed at $2.52, $2.02, $1.97 and $4.11 respectively on April 8.
Charts: OCBC Investment Research, Bloomberg
