OIR remains selective on S-REITs despite seeing tactical opportunities ahead

Khairani Afifi Noordin
2-min read

The outlook for commercial real estate in Asia is less daunting compared to the US.

Despite seeing tactical opportunities for the S-REITs sector, OCBC Investment Research (OIR) analysts remain selective, citing persisting market headwinds.

In its latest house view, OIR expects the US Federal Reserve to pause its rate hikes after one last 25 basis points increase in May, followed by the start of rate cuts from March 2024.

Given the increased vagaries in the macroeconomic landscape, the analysts believe more investors may seek shelter in defensive instruments such as S-REITs, although it would not be immune to a slowdown or contraction in economic activities.

Notwithstanding rising concerns over the US commercial real estate market in light of recent high-profile defaults as well as structural challenges facing the office sub-sector due to remote working trends, OIR believes the performance of the property sector tends to be localised.

It says that the outlook for commercial real estate in Asia is less daunting compared to the US, despite prevailing challenges. “Overall, we remain relatively more cautious of the office sector as compared to other sub-sectors,” they add.

Historically, share prices of S-REITs have performed well following a pause in the Fed’s hiking cycle, the analysts note. There were two episodes since the listing of the first S-REIT in 2002 in which the Fed held rates steady after a rate hike cycle — the first happened in Aug 2006, when the Fed kept the fed funds rate unchanged at 5.25% after 425 basis points of rate increases prior to the pause.

It subsequently cut the benchmark rate by 50 basis points in Sep 2007. During the period from the last rate hike in that cycle to the subsequent first cut, the FTSE Straits Times REIT Index appreciated 47.5%, slightly outperforming the Straits Times Index’s 45.2% increase during the same period.

Due to this, the analysts believe there are selective tactical opportunities within the sector. However, the recent rebound in oil price suggests that the risk of inflationary pressures remaining persistent still exists.

Therefore, OIR continues to recommend a bottom-up stock picking strategy, suggesting investors to position with higher quality S-REITs with strong sponsors, prudent capital management as well as resilient portfolios. This is especially as it believes the risks of a US recession in 2H2023 have increased.

“We also keep an eye on China reopening plays within the S-REITs sector, as recent economic data from China has been encouraging, such as the purchasing managers' index,” they add.

OIR’s overall top S-REIT picks are CapitaLand Ascendas REIT A17U, Frasers Logistics & Commercial Trust BUOU, CapitaLand Ascott Trust HMN, Mapletree Industrial Trust ME8U and CapitaLand China Trust AU8U.

On the other hand, its least preferred S-REITs are Suntec REIT T82U, Keppel REIT K71U and Keppel DC REIT AJBU.

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