This subsector is the weakest link in the REIT chain, say analysts

Slowing economy dragged an otherwise seasonally strong quarter.

Operational headwinds are expected to affect all REIT sub-sectors negatively, but analysts singled out hospitality REITs as the most vulnerable to the unsteady market outlook.

According to DBS, weakness is to be expected from almost all hospitality REITs come 3Q15, despite it being normally a strong quarter for the subsector.

However, hospitality REITs with regional exposure will likely perform better as Singapore outlook dims.
On the other hand, DBS expects retail REITs to sail through the storm.

“FCT and MCT will likely be the top performers amongst peer group given strong foot traffic and sustained tenant sales given their unique mall positioning in their respective locality,” DBS said.

Meanwhile, DBS expects industrial REITs to produce flattish performances.

“Market rents are expected to further moderate and rental reversionary gap to tighten further as passing rents catch up to market levels,” DBS added.

Office rents will also face increasing turbulence, as weak demand grips the subsector and more occupancy risks threaten as firms look to relocate to sub-urban locations and business parks to save costs.