See why Keppel REIT is top pick among Singapore REITs

Yield sustainability and investability rising.

In a its latest research report for Keppel REIT (KREIT), Barclays Research named KREIT as its top pick in the Singapore REIT (SREIT) sector.

"We expect the prime office market to turn, which should increase KREIT's yield sustainability beyond its income protection period (2016). Distribution-in-specie (DIS) of KREIT units by key shareholder, Keppel Corp, should also raise its investability to a level rivalling CCT (OW) and other large-cap SREITs, which, coupled with its best-in-class prime office portfolio, renders its above-peers' 5.3% yields attractive."

It also recommended switching into KREIT from CapitaMall Trust (EW) due to the latter trading more expensively.

Here's more from Barclays Research:

Prime office at a turning point: Contrary to market sentiment, we believe the risk-reward profile for the prime Grade A office sector is increasingly favourable: 1) leasing enquiries have picked up since 2013 and we believe rents have bottomed; and 2) we expect landlords to regain pricing power, as the only new supply in the next 1.5 years, Asia Square 2, is reportedly already 30% pre-committed, with below-average new supply in the prime CBD area until 2017E. We expect rents to grow 3%/10%/3% in FY13/14/15. KREIT, with its best-in-class office assets in the Raffles Place/Marina Bay financial hub area, would likely be the key beneficiary.

Yields sustainable beyond income support, investability increases: While 29% of KREIT's total income in FY12 was artificially supported, we expect positive rent reversions going forward to continue to support the 5.3% dividend yield after income support drops off in FY14 and FY16. Free float market cap would jump 48% post DIS.

MBFC 2 acquisition a catalyst; opportunity to accumulate on dips: We expect the MBFC 2 acquisition (valued at cS$1.1bn, 16% of its assets) in the next 12 months, which would solidify KREIT's number 1 office REIT position in Singapore. We would use any near-term weakness from the DIS of its c13.7% stake (366mn vs its average 2-5mn units daily trading volume) to accumulate the shares.

Risks: 1) Yields may not be sustainable if prime office rents do not recover above guaranteed levels after expiry of income support, especially for OFC (35% of assets) beyond Dec 2016; 2) KREIT has the highest gearing in the sector at 43.3%; and 3) potential fund-raising needs for the MBFC2 acquisition, albeit a double-edged sword.