Further boost to S-Reits expected over long-drawn post-Brexit process: Religare

SINGAPORE real estate investment trusts (S-Reits) have risen 4.4 per cent since last Thursday’s UK referendum, and Religare Institutional Research expects them to continue to rally over the course of the long drawn-out post-“Brexit” process. This is as federal fund rates are also expected to stay low in 2016.

The brokerage lowered its risk-free rates by 40 basis points (bps) on Monday, and upgraded its view on the sector to a “buy”, with Aims Amp Capital Industrial Reit, Mapletree Logistics Trust and Starhill Global Reit as its top picks.

After the UK referendum on June 23, both the 10-year bond yields in the US and in Singapore have fallen by 19.8 per cent and 10.1 per cent, to 1.4 per cent and 1.83 per cent, respectively.

With the continued uncertainty in Europe, Religare thinks global investors will maintain their risk-free approach for a longer period of time.

“In view of the continued market volatility, we believe that the Fed is unlikely to raise fund rates any time soon. As such, we have cut our expectations from two rate hikes in 2016 to only one, which too should be back-ended.”

All this volatility makes S-Reits a good investment option, as they should outperform the broader market given their stable dividend distribution policies, lower volatility to earnings outlook, higher yield spread (4.4 per cent) versus Reits in other countries (2.8 per cent) against the local 10-year treasury bond yields, and a relatively stable Singapore dollar versus other currencies, Religare said.

Even after taking into account the recent run-up in share price post-referendum, Reits are still offering a yield spread of around 450bps (versus 350-380 bps historically).

“As such, given the sector’s stable outlook and the rush of investors to safety, the large yield spread leads us to believe there is room for a further 10 per cent upside in the near term, assuming the 10-year bond yield does not compress further.”

If bond yields compress further, the yield spread could be even higher.

All that said, Religare is still cautious about S-Reits’ upcoming results. It expects their Q2 results to be “slightly disappointing, particularly for the hospitality sector, despite higher visitor arrivals”.

“Industrial and retail Reits are expected to deliver a flattish to mildly negative set of results amid sluggish rental markets and relatively high upcoming supply.

“Ironically, office Reits, with among the highest upcoming supply and falling spot rent, are expected to deliver the most stable performance due to the lowest amount of lease renewals within the S-Reits for the rest of the year, and the relatively low passing rent versus the current spot rent.”

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