Singapore REITs Strategy

Fed is hiking rates. e-Commerce is disrupting retail malls. Office rentals remain soft. Industrial property could see oversupply if Singapore’s economy remains weak. How should REITs investors position their portfolio? Here’s how to trade REITs smartly.

Unlike previous years, REITs investing is getting harder today

  • Fed is expected to keep hiking interest rates till 2019. REITs are leveraged asset plays. As interest rate rises, REITs pay more interest and have less cashflow for dividends.
  • Retail REITs faces severe challenges from e-Commerce. People are buying their more stuffs online and spending less money in traditional malls.
  • Office REITs face increasing supply. Rental trends continue to be soft
  • Industrial REITs could be badly hit if Singapore’s economy remains weak

 

Fear not! Here’s how investors should position their REITs portfolio

DBS thinks that it is not all doom and gloom.

  • Fed hikes should not deter REIT performance because the yield spread is in-line with long-term average and not excessive.
  • Falling new supply of office and industrial properties in 2018 would reduce fears of an oversupply and support yields.
  • The worst seems to be over for the logistics sector.
  • REITs with ample debt headroom can still grow through acquisitions.

Stay Overweight in cyclical sectors

DBS recommends to stay overweight in office and industrial REITs to take advantage of the growth momentum.

  • Office REITs – Despite falling rents, we could be near a cyclical low. This can be seen from the decent pre-commitment levels in new office properties under construction. Top pick is KREIT.
  • Industrial REITs – Drop in supply in 2018 could help stabilize asset value and yields. Look for REITs with strong balance sheet that are able to pursue yield accretive acquisitions. Top Picks: AREIT, MLT, KDCREIT and FLT.

Be early in Hospitality REITs

DBS believes that the end of the downturn in hospitality is in sight. In 2018, new supply should materially decline. Demand should also receive a boost from 2018 being a biannual conference year. Top picks: CDREIT, FEHT

Top Picks

  1. KREIT – biggest discount to book, but has the largest exposure to Premium Grade A buildings. Best positioned to benefit from a recovering Office sector
  2. AREIT – large diversified portfolio and strong balance sheet enable it to grow organically or inorganically
  3. MLT – worst is over for logistics. Good balance sheet
  4. KDCREIT – strong demand for data centers. Good balance sheet
  5. FLT – long lease agreements, good balance sheet and Sponsor’s pipeline.
  6. CDREIT – benefit from recovering hospitality demand
  7. FEHT – Low gearing and Sponsor’s pipeline.