Go for diversified developers over weak REITS this year, investors told

But office and hotel REITs are still valuable.

Investors should go for diversified developers instead of REITs in their endless quest for yield. According to UOB Kay Hian, S-REITs are transiting from being viewed as yield vehicles to growth vehicles, while developers are deep in value trading at 1SD below the historical discount to RNAV of about 14%.

“Analysis of the past P/B peaks and troughs indicates an attractive upside of 182% vs downside risk of 35%. We believe the market has over-discounted the negative prospects, pricing in a 40-50% correction in property prices. We expect a healthy 10-15% correction from the peak, beyond which they should trend in line with GDP growth (2-4%). The key re-rating catalyst will be demand side policy easing by the government. Watch out cues from public housing as price correction breaches the 10% threshold,” stated the report.

For investors who want to bet on REITs, UOB Kay Hian suggested taking advantage of the continued growth in the office and hotel sectors.

“High-beta office and hotel REITs to outperform as S-REITs are transiting from being viewed as yield vehicles to growth vehicles, led by a pick-up in office rental growth. Singapore REITs’ yield spreads of 3.8% remain the most attractive in the region. Although this is in line with the historical spread of 3.9%, yield spreads have previously shrunk to 2.5% during periods of growth (eg 2005-07), implying over 30% upside still,” UOB Kay Hian noted.