FTSE REIT Index vs STI shows STI outperforming the REIT Index
At the same time, rent reversions remain positive across all major asset classes, with double-digit levels seen in certain segments of office, retail, and data centre subclasses, the report adds.
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“With most REITs’ DPUs seeing a bottoming out or acceleration to above-trend growth, we forecast a step-change in median sector DPU growth, from a flat 10-year Cagr to around +2% p.a. over the next three years, and expect positive surprises to street DPU estimates. The return to a growth cycle will drive the sector to re-rate to tighter dividend yields and higher total returns, in our view,” Jefferies says.
Its top pick is CapitaLand Ascendas REIT (CLAR) because valuation appears attractive, and DPU is likely to grow by 3% a year on the back of $2.2 billion of recently-completed accretive acquisitions, supported by above-guidance Singapore industrial rent reversions and growing data centre contributions, the report indicates.
Interestingly, CLAR’s manager has not charged a performance fee for the past two years as the manager has to cross a hurdle rate: DPU has to grow by more than 2.5% within the financial year. The other challenge CLAR has is that 68% of the portfolio is in Singapore, with the rest scattered around the US, Europe and Australia which makes FX translations an additional headwind. On the other hand, CLAR has managed to divest a smattering of US propertes above their book value. And of course, CLAR has one of the most transparent, informative annual reports.
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Jefferies is positive on DPU-accretive deals for REITs, given the low levels of Sora and a positive yield spread between cost of debt and property yields. Jefferies also points to a “recent pick-up in property purchase and REIT equity fundraising activity after a 2022-24 lull”. The pick-up from 2024 onwards was mainly from CLAR itself, Frasers Centrepoint Trust, Keppel DC REIT and CapitaLand Integrated Commercial Trust which made headline grabbing acquisitions. All four REITs are on Jefferies’ buy list.
“We believe a revival in accretive acquisitions layers additional dividend growth prospects on top of the organic tailwinds from lower borrowing costs and rising rents,” the report says.
Since 2023, the FTSE REIT Index has underperformed the Straits Times Index significantly. The chart shows their performance, normalised to 100 since 2023. The STI has gained 58% in price alone which the REIT Index has lost 7%.
Technically, the STI, despite fits and starts, has solidified its move above 5,000. A break above the four-times-tested resistance at the 5,030-5,040 range sets an upside of around 5,740 initially, and 6,000 subsequently. Despite a retreat on Friday June 5, the breakout remains “good” with the STI on track for progressively higher levels.
