Five REITs To Outperform The Benchmark In The Next 12 Months

Real estate investment trusts (REITs) fell behind property developers in the first half of the year. However, UBS expects a reversal in this trend in the second half of the year, following the implementation of a fresh round of property cooling measures effective 6 July 2018.

Singapore REITs are likely to be more resilient amid heightened risk aversion, given their defensive traits. UBS’ most preferred REITs are CDL Hospitality Trusts (CDLHT), CapitaLand Commercial Trust (CCT), Ascendas REIT (A-REIT), Mapletree Logistics Trust (MLT) and Frasers Centerpoint Trust (FCT).

On the other hand, property developers are likely to trade rangebound as heightened policy risk casts an overhang on the outlook for Singapore’s residential property market. The outlook for residential property prices is no longer as bullish, and transaction volumes are likely to taper off following the implementation of additional cooling measures.

Here are five most preferred REITs that UBS expects to outperform the benchmark in the next 12 months.

Ascendas REIT

Defensive stocks with resilient earnings and sustainable dividends are an integral part of a diversified portfolio. A-REIT is favoured for its well-diversified portfolio as well as its tenant base. Potential catalysts could come from above-sector average rental reversions and the further back-filling of vacated space in the Singapore portfolio, as well as in Australia.

In addition, A-REIT will have substantive acquisition opportunities down the road, given its access to Ascendas-Singbridge Group’s pipeline of more than $1 billion worth of business and science park properties. A-REIT has performed well versus its industrial S-REIT peers, with rental reversions and occupancy remaining healthy despite industry headwinds.

UBS believes that A-REIT’s portfolio of quality assets should support further outperformance.

CapitaLand Commercial Trust

Despite headwinds in Singapore’s office market, CCT has managed to deliver rental growth attributed to the resilience of its portfolio to proactive asset enhancement initiatives and the acquisition of CapitaGreen. Going forward, CCT’s net property income will be bolstered by its stake in CapitaGreen. In the longer term, the redevelopment of Golden Shoe Car Park into a landmark integrated development in Raffles Place represents an attractive opportunity to enhance its portfolio of assets. UBS views CCT positively for its stable dividend yields amid an environment of low-interest rates.

CDL Hospitality Trusts

Singapore’s hospitality sector is at an inflection point. The last few years were characterised by an oversupply of hotel rooms, poor corporate travel demand, and falling revenue per available room (RevPAR). For 2018, new hotel supply growth is forecast to be just one percent as compared to four to eight percent since 2013.

A proxy to the nascent recovery of Singapore’s hotel sector, CDLHT, delivered its first RevPAR growth in 4Q17 after five years in the doldrums, and this cyclical recovery is expected to maintain its positive momentum. UBS is of the view that CDLHT’s strong balance sheet will allow it to make accretive acquisitions. Meanwhile, RevPAR is expected to grow by two to five percent this year as corporate travel demand improves and the supply of new hotels declines.

Frasers Centerpoint Trust

UBS likes FCT for its exposure to the resilient suburban retail sector, with its two largest assets, Causeway Point and Northpoint, continuing to drive decent rental reversions. Part of the strength in CCT’s reversion numbers is due to a relatively comfortable occupancy cost ratio of around 16 percent across its portfolio.

FCT is also liked for its single geographical focus on the Singapore retail market. FCT’s portfolio of malls has displayed resilience amid headwinds, delivering strong rental reversions underpinned by Causeway Point and Northpoint.

UBS expects FCT’s portfolio of suburban assets to be relatively more resilient than prime retail malls given its focus on necessity shopping.

Mapletree Logistics Trust

Although Singapore is facing a challenging leasing environment, organic demand for logistics space is healthy across the overseas markets where MLT operates.

There is potential for MLT to grow through capital recycling, the redevelopment of older assets and acquisitions. UBS believes that the management is turning its focus on high-growth markets like China and Korea, where entry net property income (NPI) yields are attractive at seven to eight percent.

Despite near-term growth concerns in Singapore, MLT’s dividend yield and price-to-book valuations are attractive relative to its 10-year history. UBS identifies potential catalysts from inorganic growth stemming from overseas acquisitions.

Related Article: