Singapore REITs get an upgrade as Fed doves & hawks tussle

SINGAPORE (April 3): CIMB Research is upgrading its sector outlook on Singapore REITs (S-REITs) from “underweight” to “overweight” on a dovish Fed outlook in addition to a potential sector re-rating ahead of a broader physical recovery in 2018.

In a report last Friday, CIMB is rotating into S-REITs after sensing the under-owned sector has appeared on the radar of investors following the Federal Open Market Committee (FOMC) March meeting, which communicated an accommodative policy.

“Given that the valuation gap between developers and SREITs has narrowed, we expect investors to take some profit from the cyclical sectors, which have done well, and find a temporary hiding in S-REITs,” said lead analyst Yeo Zhi Bin in the report.

The analyst notes that Fed chair Janet Yellen has assured that the Fed has not decided on a faster pace of tightening, and signalled that it can tolerate inflation temporarily overshooting the 2% target – despite maintaining its guidance of two more rate hikes this year and another three in 2018.

They also highlight a likelihood that US Treasuries could peak in 2017 on socio-political shifts this year.

“On the flip side, a growth-led rate increase implies faster/sharper macro recovery. While earnings could lag, we believe that REITs could re-rate on improved sentiment due to a broader physical market recovery in 2018. The momentum of rental reversion turning positive could also result in sector yield compression,” said Yeo.

CIMB is therefore maintaining its preference for the hotel sub-sector on anticipation of it delivering the most alpha, but expects the general leasing market to remain lacklustre in the year ahead.

The research house has notably highlighted CDL Hospitality Trusts (CDREIT) and Mapletree Greater China Commercial Trust (MGCCT) which they have identified as laggards, deeming the former favourable on the premise of a recovery in the hospitality sector in 2018, while saying the latter could re-rate upon a favourable finalisation of the actual value-added tax (VAT).

“It is a unique proxy for both the nascent Hong Kong retail recovery and USD strength,” comment the analysts on MGCCT.

As at 11.20pm, units of CDREIT and MGCCT are both trading flat at S$1.44 and S$1.02 respectively. —

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