S-REITs to generate yields despite economic weakness: analyst

Industrial REITs are a top pick due to its longer weighted lease expiry supporting distributions.

The average yields of S-REITs have bounced back to around 5.5%, despite seeing a 6.5% decline in prices last week, according to DBS Group Research. This figure also implies a spread of over 4% against the Singapore 10-year bond yields.

“The broad-based sell-off in S-REITs of up to 4-5% in a day is certainty noteworthy,” said Derek Tan, an analyst at DBS Group Research. “We see [this] as an opportunity to accumulate S-REITs on expectations that the low interest environment and high headline yields will attract investor interest back to S-REITs after the market stabilises.”

The report stated that their preference includes industrial S-REITs because of their longer weighted lease expiry (WALE) supporting distributions. Office REITs, including US office REITs, are also attractive as its potential acquisitions may drive distributions higher.

Despite being directly impacted by COVID-19, suburban retail landlords (CapitaLand Mall Trust and Frasers Centrepoint Trust) are expected to fare better in a “U-shape” recovery, given their asset positioning that caters to consumers’ daily necessities and location within high-density residential areas.

“In fact, feedback from landlords is that traffic is returning (before we see a pickup in sales) and with retail REITs trading at c.5% yields, we may potentially see bargain hunters returning at current levels,” Tan said.

As for hospitality REITs, Tan noted that they are now trading at -1 standard deviation (-1 SD) on a 5-year P/NAV basis, and has most likely priced in most of the negatives. Hoteliers indicated that occupancy rates across hotels are over the 50% level, meaning that the worst may not be as bad as initially feared.

The report cited Ascott Residence Trust (ART) and Far East Hospitality Trust (FEHT) given the high fixed rents (up to 70% of revenues) which limits downside risk. ART and FEHT are projected to deliver yields of up to 4.7% and 4.9%, respectively.

“In the medium term, we believe S-REITs will continue to be an important and relevant component of investors’ portfolio, especially given the sector’s increasing representation in major indices (current and future) such as the MSCI, STI, EPRA Nareit Developed World Index. Coupled with high yields of 5.5%, investors will eventually be drawn back into the S-REITs sector,” Tan added.

Moving forward, more firms are expected to consider work-from-home (WFH) or embrace flexible working arrangement practices, which means that demand for office space over time may moderate. In response, landlords could restructure leases or their floor plates to offer a higher percentage of flexible office offerings in the longer term.

Meanwhile, e-commerce activity will most likely pick up within retail and hospitality as consumers start to embrace deliveries. However, this will be countered by businesses using more video conference facilities that will over time result in less business travel.