Kiss goodbye to high REIT yields in Singapore

SINGAPORE (Dec 20): DBS Group Research has an “underweight” rating on the Singapore REIT sector as it anticipates four interest rate hikes by the US Federal Reserve in 2017 alone.

“Heightened expectations of a faster rate hike momentum in 2017 under new US President Trump’s administration will likely cast a shadow on Singapore REITs’ ability to maintain its share price outperformance going forward,” say DBS analysts Derek Tan and Mervin Song.

But that’s not the only bad news for REITs. Tan and Song anticipate a slowdown in the local economic outlook which could affect rentals and occupancy rates. They have forecast market rentals to decline by between 5% and 10% and rental reversions to be flat or negative. Excluding these, DPU growth is already forecast to be just 1.3% for FY2017, compared with the 5-year historic average of 3%.

As it stands, the REITs are going to have a difficult time growing its portfolio given the higher cost of capital. So Tan and Song expect to see more REITs to recycle their assets and re-invest the proceeds in “newer, higher yielding properties with a longer operational runway”.

Still, distributions for 2017 look secure, as only 20% of total debt would need to be renewed in the new year. The pair forecast a 1% increase in refinancing cost for 2017, which would impact distributions by 1.8%.

Beyond that, however, the duo believes that REITs would need to grow their revenue streams and reduce “the impact from higher interest costs in the medium term”.

DBS’ preferred REITs include Ascendas REIT, Mapletree Commercial Trust, Frasers Logistic and Industrial Trust and Keppel DC REIT, which have the “ability to still grow in the current environment and offer superior growth visibility”.

Tan and Song also like the attractive valuations of the office REITs like Keppel REIT, which would benefit from the recovery of the office sector, as well as Croesus Retail Trust for its valuations and higher yields.

Units of Ascendas REIT, Mapletree Commercial Trust, Keppel DC REIT and Keppel REIT are trading at S$2.34, S$1.40, S$1.22, S$1.02 respectively.

Meanwhile, Frasers Logistic Trust and Croesus Retail are trading at 92 cents and 84 cents respectively.