S-REIT outlook darkens as QE tapering becomes likely in September

See how S-REITs will be hurt.

According to OCBC, there are now "fairly solid grounds for a base case that the Fed would taper QE in Sep 2013 or soon after" which led the research firm to downgrade the S-REIT sector to NEUTRAL.

OCBC cited three key reasons for its investment downgrade.

"First, we believe this is the beginning of a long term secular, not cyclical, trend of rising interest rates. Higher discount rates and liquidity factors, due to capital reallocation across asset classes, would likely negatively
impact REIT prices over the mid to long term. Second, we believe a limited fundamental growth outlook for the sector is unlikely to trump the negative impact of rising rates on S-REIT prices," said OCBC

"Finally, a key proxy for cheapness – the sector’s yield spread against the SG 10Y bond – implies that the sector appears fairly priced now," it added.

OCBC said its most preferred sub-sectors are domestic retail and office because these still have rental outlooks and valuations that remain "fairly appealing."

Its top picks include CapitaCommercial Trust [BUY, FV: S$1.61], Starhill Global REIT [BUY, FV: S$0.95] and Suntec REIT [BUY, FV: S$1.80].