OCBC Research warned investors on Tuesday about the performance of S-REITS, urging them to reallocate their capital as they may achieve “almost no total return” from now until the end of next year. More worryingly, investors may be hit by a rapid initial capital loss as prices fall, before subsequently recovering to par on dividend gains.
The broker expects rising interest rates in the US and declining distributions growth to make the risk-reward of the REIT sector "unfavourable”. The prospect of rate hikes will prompt investors to shift from seeking yields to capital preservation.
With this in mind, it recommends that investors practise bottom-up stock picking in the sector and "active capital reallocation into high-end developers and real estate players in strong growth segments" such as high-end homes, logistics facilities and data centres. It likes developers of high-end properties such as Wing Tai, Wheelock and OUE instead. It also likes Global Logistics Properties, which builds modern logistics facilities in China and Brazil where supply is not enough to meet demand from rising e-commerce.
"We see attractive risk-reward in deeply discounted high-end developers with healthy balance sheets, and believe excessive pessimism has been priced into their equities. While the timing of curb reversals (if any) is uncertain, we highlight that the authorities have a track record of actively reviewing property legislation and we view reversals to be a possibility when overall prices decline more than 10 per cent," it said.
As at Q1 this year, prices have fallen about 6.9 per cent from the last peak in Q3 2013.
Looking beyond the traditional sub-sectors of office, retail, industrial and hospitality, OCBC is interested in pure-play data centre Reit Keppel DC REIT, because of its exposure to the high-growth data centre industry, high occupancies, long lease expiries and annual rent increases.
From a bottom-up stock-picking perspective, OCBC has ‘buy’ calls on Frasers Centrepoint Trust, Frasers Commercial Trust and Starhill Global Reit. It also downgraded First Reit to "hold", and Mapletree Industrial Trust and Suntec Reit to "sell".
The authors of the OCBC report, Eli Lee and Andy Wong, believe the S-Reits sector's DPU is expected to grow 3.8% y-o-y in FY2015. This is expected to ease to 3.2% in FY2016, before slowing to 2.2% in FY2017. This is because of severe supply pressures across different sub-sectors, leading to landlords having to offer competitive rates to maintain their occupancy levels. As Reit portfolios' rents approach market rents, this would result in less positive or even negative rental reversions, said OCBC.
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The broker expects rising interest rates in the US and declining distributions growth to make the risk-reward of the REIT sector "unfavourable”. The prospect of rate hikes will prompt investors to shift from seeking yields to capital preservation.
With this in mind, it recommends that investors practise bottom-up stock picking in the sector and "active capital reallocation into high-end developers and real estate players in strong growth segments" such as high-end homes, logistics facilities and data centres. It likes developers of high-end properties such as Wing Tai, Wheelock and OUE instead. It also likes Global Logistics Properties, which builds modern logistics facilities in China and Brazil where supply is not enough to meet demand from rising e-commerce.
"We see attractive risk-reward in deeply discounted high-end developers with healthy balance sheets, and believe excessive pessimism has been priced into their equities. While the timing of curb reversals (if any) is uncertain, we highlight that the authorities have a track record of actively reviewing property legislation and we view reversals to be a possibility when overall prices decline more than 10 per cent," it said.
As at Q1 this year, prices have fallen about 6.9 per cent from the last peak in Q3 2013.
Looking beyond the traditional sub-sectors of office, retail, industrial and hospitality, OCBC is interested in pure-play data centre Reit Keppel DC REIT, because of its exposure to the high-growth data centre industry, high occupancies, long lease expiries and annual rent increases.
From a bottom-up stock-picking perspective, OCBC has ‘buy’ calls on Frasers Centrepoint Trust, Frasers Commercial Trust and Starhill Global Reit. It also downgraded First Reit to "hold", and Mapletree Industrial Trust and Suntec Reit to "sell".
The authors of the OCBC report, Eli Lee and Andy Wong, believe the S-Reits sector's DPU is expected to grow 3.8% y-o-y in FY2015. This is expected to ease to 3.2% in FY2016, before slowing to 2.2% in FY2017. This is because of severe supply pressures across different sub-sectors, leading to landlords having to offer competitive rates to maintain their occupancy levels. As Reit portfolios' rents approach market rents, this would result in less positive or even negative rental reversions, said OCBC.
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