Here’s why it’s finally party time for Singapore REITs

Low interest rates are here for longer.

As fears of a steep interest rate hike wane, analysts argue that it’s finally payback time for battered S-REITs.

“Our house view that interest rates will remain lower for longer means that we believe SREITs will continue to garner investor interest,” said Yeo Zhi Bin, equity analyst at CIMB.
Yeo argued that S-REITs are still attractive, with their 7.2% distribution per unit (DPU) yield still 460bp above the Singapore 10-year bond yield.

However, he said that in contrast to the previous upcycle, SREITs’ share prices will be more range-bound this time, as toplines will grow more slowly while funding cost environment will remain challenging.

“The SIBOR and SOR rates in Singapore have risen by up to 34-77bp in the last 12 months and the effects have been felt in S-REITs’ costs, which showed a slightly higher qoq blended rate in 4Q15. On the flip side, S-REITs have locked in 60-100% of their interest costs. As such, we expect the effects of the rise in funding costs to materialise in a limited and controlled manner when the REITs refinance their loans,” Yeo said.

Meanwhile, BNP Paribas analyst Chong Kang Ho said that SREITs are entering a period of investment opportunity for given a pause in the rate-hike cycle.

“With the market being over bearish on S-REIT in 2015 on the back of rate-hike expectations (S-REIT index fell by 10.7%), we believe later-than-expected rate normalization could help boost S-REIT sentiment. One key risk is that market turbulence abates and leads to an early rate hike in 2016. At current levels, the S-REITs trade at an attractive dividend yield of 7.5% on average,” Chong said.