Is there still a reason to be bullish on SREITs?

They will outperform the market, says DBS.

Singapore-listed real estate investment trusts were surprisingly resilient against the bloodbath that shook global markets in the first month of the year. A report by DBS Vickers said that SREITs will continue to outperform the broader market in coming months, as jittery investors flee to high-yielding assets.

DBS said that SREITs fell by a marginal 3% year-to-date, much smaller compared to the 11% drop in the overall market.

“We believe that near term performance will be firm and largely macro driven, with increasing expectations of delay in further FED hikes to be positive for share prices in the near term,” DBS said.

Although some investors fear that SREITs will suffer once borrowing costs rise, DBS noted that these companies have adequate buffers which will help mitigate the effects of higher refinancing costs. The report noted that average gearing remains manageable at 34%, while fixed-rate hedge profiles are high at 80%.

“While higher interest rates are a potential risk in the medium term, we remain comforted by S-REITS’ conservative capital strategies,” DBS said.

The report showed that REITs outperform 10-year Singapore government bonds in terms of yield. The sector trades at 0.9x price-to-book, and offers investors a yield of 7.1%. This implies a yield spread of 4.9% against the 10- year government bond of 2.2%. 

“We believe current spreads to be attractive, at more than 1% than the sector’s 10-year and 5-year trading averages of 3.8% and 4.1% respectively,” DBS said.