Daiwa tipped Singapore REITs as bond proxies which should probably be avoided in an inflationary and rising interest rate environment, but it addedm yield seekers may find solace in another sector: banks.
”In a rising interest rate environment, which appears more and more likely to us, banks could be the new safe havens as REITs would not be immune to rising long-bond yields, as this would erode their yield spreads, and higher borrowing costs, which would further drag their dividend-per-unit (DPU) growth,” it said in a note on Wednesday.
“With few exceptions, we expect weak, low single-digit DPU growth to continue for most S-REITs,” it said.
‘Compelling yield alternative’
Daiwa said it viewed DBS as a compelling yield alternative, calculating a “yield plus growth” metric for the bank at 10.8 percent, with 4.3 percent yield plus a three-year dividend per share (DPS) compound annual growth rate (CAGR) of 6.5 percent, which beats most of the S-REITs it covers.
“We believe the yield and DPS-growth outlook of DBS matters greatly in the Singapore market because it has emerged as a highly attractive yield play overnight,” it said, noting DBS raised its core semi-annual DPS to S$0.60 in February. “Moreover, DBS’s underlying fundamentals and earnings outlook would also improve with rising interest rates and the steepening of the yield curve.”
It rated DBS at Outperform, with a target price of S$30; the stock ended Thursday up 0.5 percent at S$28.23.
Daiwa kept a Neutral call on the S-REIT sector as the sector yield spread has returned to the long-term average of 3.6 percent after the February correction.
Negative on office REITs
But it added that it was Negative on office REITs, on a combination of low absolute DPU yields, below-average DPU growth and high negative DPU sensitivity to borrowing cost increases. It said that makes them “highly unfavourable investments in the current environment.”
However, it said it was Positive on retail REITs, citing the resilience of the core suburban mall properties and the possibility of an uptick in consumer sentiment and retail sales ahead.
Among individual REITs, Daiwa said it was negative on office REITs CapitaLand Commercial Trust, Suntec REIT and Keppel REIT. Among the retail REITs, it had Outperform ratings on CapitaLand Mall Trust, Frasers Centrepoint Trust and Starhill Global REIT.