SINGAPORE (Dec 5): RHB Research is maintaining its “overweight” rating on the property sector as yields of Singapore REITs overtook 10-year government bond yields by 4.3%, above the historical average of 4%. The S-REIT sector also had the highest absolute yields against all REIT sectors globally.

RHB’s analyst Vijay Natarajan believes S-REITs will find favour again in FY17, given the uncertain economic outlook, and considers this a “good re-entry level for long-term investors”.

So which S-REIT sectors should investors pick? And which should they avoid?

Natarajan recommends industrial REITs with exposure to business parks. “Demand supply dynamics remain favourable in this segment, with very limited supply coming on-stream over the next two years, and we expect rents to increase by 1% to 5% in 2017,” he writes in a note on Monday.

On the other hand, he expects rents for the factory and warehouse logistics segment to fall between 3% and 7% due to persistently high supply coupled with poor demand. To that end, he recommends Ascendas REIT with its diversified industrial property exposure, and Viva Industrial Trust for its business park exposure and high dividend yields of above 10% for FY17.

In the retail space, Natarajan expects suburban malls to remain resilient even as retail sales growth is expected to remain sluggish, as these malls cater to the local population and is driven by necessity spending. He recommends Frasers Centrepoint Trust for its strong suburban mall portfolio and potential upside from redevelopments and acquisitions, which are supported by its healthy balance sheet.

Office REITs on the other hand continue to be depressed, with an oversupply problem and the anticipated fall in rents by 5% to 10% next year. For FY17, 3 million sf of supply is coming onstream, compared with the 10 year average demand of just 1.25 million sf. Natarajan notes that the sector could see a bottoming out sometime in early 2018 when supply eases off.

Incidentally, Natarajan points out that a number of office REITs have been able to mitigate some of the risks by renewing the majority of its leases early. He recommends CapitaLand Commercial Trust as the REIT has the potential to grow its shareholder value through the redevelopment of Golden Shoe Carpark and AEIs at Raffles City.

The hospitality sector would be one to avoid, according to Natarajan, as revenue per available room is forecast to fall by 3% to 5% in FY17 as new supply continues to come onstream. At the same time, corporate travel demand has weakened and average length of stay has continued to shrink.

Instead, he recommends Manulife US REIT as a proxy to the growing US economy, with its exposure to US office property and the US dollar.

Units of Ascendas REIT, Viva Industrial Trust and CapitaLand Commercial Trust are trading higher at S$2.37, 75.5 cents, and S$1.54 respectively. Frasers Centrepoint Trust and Manulife US REIT are trading lower at S$1.93 and 83 cents respectively. —

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