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Have S-REITs reached a bottom in March? DBS optimistic on retail, industrial names

Jovi Ho
·4-min read

Most bad press have been focused on US-focused names, where a deteriorating economic outlook places uncertainty on dividends.

With the US Fed softening its initially hawkish approach, resilient Singapore REITs (S-REITs) can expect a blessing in disguise, write DBS Group Research analysts Geraldine Wong and Derek Tan.

The operational outlook for various sectors remains on a general uptrend, note Wong and Tan, though REIT managers are cautious given economic headwinds.

“Overall, we remain comfortable with our thesis that suburban retail and industrial sectors will continue to see the brightest prospects based on observations of strong crowds at the malls during the weekdays and various conversations with leasing managers,” say the analysts.

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The office subsector continues to be resilient, say Wong and Tan, supported by high occupancy rates with strong demand and take-up for co-working spaces.

In addition, the analysts remain optimistic on hospitality S-REITs, with most hoteliers looking at another year of robust performance.

Most bad press have been focused on US-focused names, say Wong and Tan, where a deteriorating economic outlook places uncertainty on their dividend outlook.

Digital Core REIT and Manulife US REIT

At Digital Core REIT (DCREIT) DCRU, the tenant’s financial health has been called into question. The credit rating of Cyxtera, DCREIT’s second-largest tenant accounting for some 23% of total revenues, drew concern following a recent downgrade by Moody’s from B3 to Caa2.

While the business fundamentals of Cyxtera look to be stable, the rating agency was concerned with the firm’s ability to service debt obligations in the medium term.

DCREIT’s share price has since corrected by 20.4% in the month of March, with forward yields of 7.5% at current share price.

Meanwhile, Manulife US REIT’s (MUST) BTOU share price fell by 14% in a day with rumors that discussions on the proposed transaction between South Korea’s Mirae Asset Global Investments and MUST had fallen through.

Wong and Tan say media reports amplified short sellers’ bearish bets against the US office sector on potential credit tightening. “Trading at 0.5x price-to-book, MUST’s current valuation is substantially below pre-Covid-19 lows.”

Fed changes course

Initial expectations for a 50 basis points (bps) rate hike in March to combat stubborn inflation was subdued with the recent banking sector turmoil, say DBS’s analysts. “The Fed’s move to administer a 25 bps interest rate hike on March 22 gave the markets a breather following two major bank failures in the US, which has seen a spillover effect towards the European banking sector.”

The credit crunch will aid in cooling the economy, say Wong and Tan in an April 4 note. “With cracks emerging in the global banking system, the Fed will likely soften its hawkish interest rate approach given that the sudden spike in both inflation and interest rates had been the root cause of systematic risks in the banking sector.”

According to CME Group’s FedWatch, market participants are expecting the Fed’s benchmark to hold steady within the 4.75% to 5.00% target range by 4Q2023 before potentially cutting borrowing costs.

Have S-REITs bottomed?

March was a relatively flat month for S-REITs with the FTSE ST Real Estate Investment Trusts (FSTREI) index declining 0.4% m-o-m, slightly underperforming the broader Straits Times Index (STI), which retreated 0.1% m-o-m in the same period.

Wong and Tan note that the S-REITs rally was concentrated in the last one to two weeks of the month following the turmoil in the US banking sector, which led to a shift in the expected course of interest rate hikes.

Best performing sectors for the month were industrial large caps (up 2.4% m-o-m), office (down 1.4% m-o-m) and retail (down 3.2% m-o-m).

Best performing stocks for March were Keppel DC REIT (up 4.0% m-o-m) and CapitaLand Ascendas REIT (up 3.2% m-o-m).

On the back of industry specific news, alongside a declining economic landscape, most S-REIT subsectors underperformed in the month of March, with the return of a flight to quality trend towards large-cap industrial stocks, say Wong and Tan.

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