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Singapore REITs Monthly: Feb24 Expectations of Rate Cuts Pushed to 2H24

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Publish date: Mon, 18 Mar 2024, 11:08 AM
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  • The S-REITs Index fell 5.1% in February, following the 4.4% decline in January after rate cut expectations were pushed to 2H24. The top performer for the month was Cromwell European REIT (CERT SP, non-rated) – it gained 2.1% after commendable results, with DPU falling only 8.7% despite higher finance costs and the absence of contribution from redevelopment and €197mn of asset sales. The worst performer was Keppel Pacific Oak US REIT (KORE SP, non-rated) – it fell 55.4% after halting distributions to conserve capital. The overseas retail sub-sector was the top performer in February, falling 2.7%, lifted by Sasseur REIT (SASSR SP, BUY, TP S$0.87) which reported strong outlet sales growth (+31.9%). The worst performing sub-sector continues to be overseas commercial. It fell another 19.3% after falling 13.2% the month before, dragged down by Singapore-listed US office REITs.
  • S-REITs are now trading at a forward dividend yield of c.6.4% (+0.5x s.d.) and a P/NAV of 0.87x (-1.9x s.d.).
  • We remain OVERWEIGHT on S-REITs as we enter a monetary easing cycle. We continue to favour REITs with a healthy balance sheet, strong sponsors, and improving operating metrics, such as REITs in the hospitality and retail sub-sector. Catalysts are expected from a pick-up in the economy, asset recycling, and interest rate cuts. Top picks are CapitaLand Ascott Trust (CLAS SP, ACCUMULATE, TP S$1.04) and Frasers Centrepoint Trust (FCT SP, ACCUMULATE, TP S$2.38).

 

SECTOR ROUND-UP

In the FOMC meeting on 19-20 March, we expect the federal funds rate to remain at 5.25-5.5% for the fifth straight meeting. The Fed remains on track to cut interest rates this year, but expectations of any rate cuts have been pushed to 2H24, resulting in the S-REITs Index’s poor performance. With lower interest rates, S-REITs will experience 1) lower financing costs, 2) higher dividend yield spreads over bonds, and 3) higher property valuations as cap rates compress. Furthermore, with interest rates peaking, we expect deal-making to return in full swing. Therefore, we expect a sector recovery in 2024-2025.

 

Prime US REIT’s CEO, Mr Harmeet Singh Bedi, has resigned. Mr Rahul Rana, a shareholder of KBS Asia Partners Pte. Ltd., which is, in turn, the sponsor of Prime US REIT, will take over as CEO of the manager. Due to this change in management, our recommendation for Prime US REIT is now under review until further notice.

 

Retail

Jan 24 retail sales index (excluding motor vehicles) fell 2.1% YoY, compared with the 2.8% decline in Dec 23. The wearing apparel & footwear industry was the biggest decliner at 11.8% YoY due to lower demand for wearing apparel. The food & alcohol and watches & jewellery industries recorded the highest YoY growth at 8.5% and 5.3% respectively.

The F&B services index fell 5.6% YoY in Jan 24, after the 0.4% growth in Dec 23, with restaurants registering a YoY decline of 16%. This was due to Chinese New Year being celebrated in February in 2024 while it was in January in 2023. However, we think retail sales will be resilient in 2024 boosted by the extra S$600 in CDC vouchers, cash payments of S$200 to S$400 for eligible Singaporeans, and S$200 in LifeSG credits for all national servicemen.

 

 

 

Source: Phillip Capital Research - 18 Mar 2024

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