Singapore REITs show potential for gains with improving macroeconomic conditions and sector rotation. Upgraded stocks CLAR and MLT offer attractive investment opportunities.
Maybank Research offers a comprehensive analysis of Singapore Real Estate Investment Trusts (SREITs), highlighting current macroeconomic conditions, sector performance, and specific stock recommendations.
Key Points on Singapore REITs
Macroeconomic Environment
- US CPI Data: The June Consumer Price Index (CPI) saw a 0.1% month-over-month decline, the first since May 2020. Core CPI, which excludes volatile food and energy prices, also saw a modest increase of 0.1%. This data suggests a potential decrease in the discount rate for SREITs.
- Singapore’s Economic Growth: Growth is broadening, with resurging loan demand and increased bond issuances, presenting a favorable environment for SREITs.
Sector Performance
- Underperformance: The SREIT index has underperformed compared to the Straits Times Index (STI) and other regional peers, down approximately 9% year-to-date and over the past 12 months. However, the index has recently rebounded by about 6% from its lows.
- Yield Analysis: The yield has declined by 7 basis points recently, whereas a 70 basis point decline in Q4 2023 led to an 18% return. The report estimates that every 50 basis point fall in the risk-free rate increases fair value by 10% on average.
Distribution Under Pressure
Upgrade CLAR and MLT to BUY; Raise TP for CICT
“We tactically upgrade, and raise our TPs for, CLAR and MLT to BUY on the back of higher net property income, lower borrowing cost and a 20bps decline in discount rate. Manufacturing growth led by electronics augurs well for CLAR. While China remains a headwind for MLT, appreciation of the JPY and other regional currencies against the SGD can benefit MLT. Adverse FX movements last year impacted topline growth by 4-5%pt. We raise our target price for CICT to SGD2.25 as well and maintain BUY. We transfer coverage of CLAS, MINT, MPACT and Suntec REIT to Jialin Li with unchanged ratings and TPs,” says Maybank.
- Financial Costs: Higher financial costs are expected to outweigh any improvements in revenue, leading to a potential year-over-year decline in distributions per unit (DPU) for most SREITs, excluding a few like CICT and KREIT.
- Valuation Losses: Specific assets, particularly in Italy for Lendlease REIT, may see further valuation losses.
Stock Recommendations
- Upgrades: The report upgrades CapitaLand Ascendas REIT (CLAR) and Mapletree Logistics Trust (MLT) to BUY status due to anticipated higher net property income, lower borrowing costs, and favorable macroeconomic conditions.
- Target Prices: The target price for CapitaLand Integrated Commercial Trust (CICT) has been raised to SGD 2.25, maintaining a BUY recommendation.
Reporting Calendar and Key Discussion Points
- CLAR: Occupancy and pre-commitments, especially in Singapore and the US, as well as business park demand.
- MLT: Geographic diversification, divestments, impact of the Johor-Singapore Special Economic Zone (SEZ), and occupancy rates in China and Japan.
- MINT: Divestments, acquisition of data centers, and occupancy in high-tech sectors.
- CICT: M&A plans, office asset valuations in Australia, and debt costs.
- FCT: Updates on asset enhancement initiatives, tenant sales growth, and gearing.
- Other REITs: Similar detailed analysis for other SREITs, focusing on occupancy, debt costs, and specific asset updates.
Implications for Investors
- Potential for Rotation: Given the underperformance relative to the STI and regional peers, there is room for rotation into the SREIT sector. Sustained outperformance, however, will depend on moderating inflation without sacrificing growth.
- Selective Investment: Investors are advised to focus on frontline names with robust fundamentals and specific catalysts. The upgrades of CLAR and MLT suggest these are key picks due to their improved financial outlooks.
The Maybank report presents a nuanced view of the SREIT sector, balancing the current macroeconomic tailwinds with potential challenges in distribution and asset valuations. Investors are encouraged to consider the upgraded stocks CLAR and MLT while monitoring the broader sector’s performance closely.