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Broker's take: Look for recovery and resilience plays in S-Reits, says OCBC

OCBC said it observed trends in the latest reporting season that retail Reits had stable occupancy, with some seeing slightly improved take-up quarter on quarter.

YIELD-HUNGRY investors can look to a "recovery basket" and a "resilient basket" when investing in Singapore-listed real estate investment trusts (S-Reits), OCBC Investment Research said in a note on Monday.

This comes as the research team continues to remain "overweight" on S-Reits amid a lower-for-longer interest rate environment, improved sentiment arising from potential Covid-19 vaccines and "undemanding" valuations.

The recovery basket plays on the improvement in sentiment and recovery prospects of Reits in beaten-down sectors such as hospitality and retail.

"The optimism over an imminent availability of Covid-19 vaccines has fuelled confidence that the global economic recovery will gain momentum in 2021," OCBC said. "This has underpinned a rotation to laggards and value stocks."

Its picks for the recovery basket are CapitaLand Integrated Commercial Trust with a fair value (FV) of S$2.38, Mapletree North Asia Commercial Trust with FV of S$1.04, Frasers Centrepoint Trust with FV of S$2.75, Ascott Residence Trust with FV of S$1.20, and CapitaLand Retail China Trust with FV of S$1.35.

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OCBC said it observed trends in the latest reporting season that retail Reits had stable occupancy, with some seeing slightly improved take-up quarter on quarter.

However, it noted that some of these might have been at the expense of rents, as the priority of Reit managers was to retain tenants and minimise vacancy risks amid a soft leasing environment.

OCBC also noted that competition from e-commerce will continue to pose structural challenges for brick-and-mortar retail, but it believes the positive vaccine developments have improved the outlook for the retail sub-sector with a potential return to normalcy soon.

"The boost in investors' sentiment could thus lead to a further re-rating, especially for the higher-quality retail Reits," OCBC said. It added that it has turned more positive on hospitality Reits following positive news on Covid-19 vaccine developments.

"While recovery in industry revenue per available room/unit back to pre-Covid-19 levels is likely to happen only in 2022 or 2023, the forward-looking nature of investors leads us to believe the re-rating of hospitality Reits can continue, although volatility in (unit) prices is likely," OCBC said.

The second basket for investors to consider is the "resilient basket". It consists of S-Reits - which OCBC views as beneficiaries of secular growth trends - such as those exposed to data centres, logistics and business parks.

OCBC's picks include Ascendas Reit with FV of S$3.92, Keppel DC Reit with FV of S$3.41, Frasers Logistics & Commercial Trust with FV of S$1.59, Mapletree Industrial Trust with FV of S$3.51, and Manulife US Reit with FV of US$0.84.

"We recommend investors to take advantage of pullbacks to add positions as investors switch to laggards and value stocks," the research team said, noting that these Reits could outperform in the medium to longer term.

OCBC noted that industrial Reits under its coverage largely exhibited relatively resilient operating metrics in the latest reporting period, with nearly all achieving slight improvement in portfolio occupancy rates quarter on quarter. However, it added that rentals of industrial properties had fallen by 0.9 per cent in Q3 from the previous quarter, according to JTC data.

OCBC also noted that the valuation of S-Reits is "undemanding", with the current forward yield spread between the FTSE Straits Times REIT Index and the Singapore government 10-year bond yield now 453 basis points (bps), around 0.6 standard deviation above the 10-year average of 418 bps.

It is now forecasting distributions per unit for the S-Reits under its coverage to register a market cap weighted decline of 5.4 per cent for the current financial year, followed by a "solid rebound" of 15.5 per cent for the next financial year, largely due to a lower-base effect from rental concessions and restrictive border closures in 2020, OCBC said.

While the research team remains "overweight" on S-Reits, it said it is cognisant of the risk of a further potential spike in sovereign bond yields, which could make S-Reits relatively less attractive.

It added that investors should be aware the road to recovery may be challenging, as potential manufacturing bottlenecks and logistical difficulties in administering Covid-19 vaccines to the wider population for herd immunity could lengthen the recovery period.

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