Why Singapore REITs are ‘misperceived’ as interest rates rise

Singapore two-dollar bills

Amid rising interest rates, Singapore’s REITs are being “misperceived” as bonds and their valuations aren’t as “expensive” as they might seem, DBS said.

“REITs are not straight out bonds and the impact of rising interest rates is mitigated by an expected upturn in rents,” DBS said in a note last week.

DBS also noted that while S-REITs’ current yields and yield spreads may be near five-year lows, that pegs their valuation metrics to an “improper period,” advising looking at a longer historical track record and at the backdrop of a likely multi-year upturn in the Singapore property market.

“The last five years have largely seen excess supply, falling rents and sluggish business environments,” it said. “In contrast, we are heading towards a period of easing supply pressure, a more buoyant economy and rising rents.”

DBS estimated that S-REIT yield spreads could tighten to 3 percent from 3.4 percent currently.

Value of acquisitions

Additionally, S-REITs have been pursuing acquisitions, DBS noted, pointing to 20 acquisitions valued at S$5.0 billion by five S-REITs over the past six months.

“This inorganic strategy we believe has been underappreciated, as these deals not only help offset the impact of rising interest rates, but also
speeds up the expected improvement in distribution per unit (DPU) growth,” it said. “A strong DPU outlook going forward, warrants higher share prices and not lower prices that we have seen over the last few months.”

DBS tipped that with the office and hotel sectors set for the strongest pickup in income over the next year as supply pressures are easing, it’s an “opportune time” to acquire selected S-REITs in those segments.

It said its top picks were CapitaLand Commercial Trust, Suntec REIT and CDL Hospitality Trusts. It also said it liked Ascendas REIT and Mapletree Logistics Trust for exposure to a potential turnaround in the industrial sector.

DBS added that Frasers Centrepoint Trust “warrants a relook” on its strong near-term DPU growth.

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