Given the increased vagaries in the macroeconomic landscape, the analysts believe more investors may seek shelter in defensive instruments such as S-REITs, although it would not be immune to a slowdown or contraction in economic activities.
Notwithstanding rising concerns over the US commercial real estate market in light of recent high-profile defaults as well as structural challenges facing the office sub-sector due to remote working trends, OIR believes the performance of the property sector tends to be localised.
It says that the outlook for commercial real estate in Asia is less daunting compared to the US, despite prevailing challenges. “Overall, we remain relatively more cautious of the office sector as compared to other sub-sectors,” they add.
Historically, share prices of S-REITs have performed well following a pause in the Fed’s hiking cycle, the analysts note. There were two episodes since the listing of the first S-REIT in 2002 in which the Fed held rates steady after a rate hike cycle — the first happened in Aug 2006, when the Fed kept the fed funds rate unchanged at 5.25% after 425 basis points of rate increases prior to the pause.
See also: SAC Capital initiates ‘buy’ on Sanli Environmental after $105.3 mil contract win from PUB
It subsequently cut the benchmark rate by 50 basis points in Sep 2007. During the period from the last rate hike in that cycle to the subsequent first cut, the FTSE Straits Times REIT Index appreciated 47.5%, slightly outperforming the Straits Times Index’s 45.2% increase during the same period.
Due to this, the analysts believe there are selective tactical opportunities within the sector. However, the recent rebound in oil price suggests that the risk of inflationary pressures remaining persistent still exists.
Therefore, OIR continues to recommend a bottom-up stock picking strategy, suggesting investors to position with higher quality S-REITs with strong sponsors, prudent capital management as well as resilient portfolios. This is especially as it believes the risks of a US recession in 2H2023 have increased.
See also: CGSI downgrades Grab to ‘hold’ ahead of 2QFY2025 results, expects consumer spend to slow in 2H2025
“We also keep an eye on China reopening plays within the S-REITs sector, as recent economic data from China has been encouraging, such as the purchasing managers' index,” they add.
OIR’s overall top S-REIT picks are CapitaLand Ascendas REIT, Frasers Logistics & Commercial Trust, CapitaLand Ascott Trust, Mapletree Industrial Trustand CapitaLand China Trust.
On the other hand, its least preferred S-REITs are Suntec REIT, Keppel REITand Keppel DC REIT.
