REITs to remain favourable in near term

Since the beginning of the year, the Straits Times Re Invest Trust Index (FSTREI Index - an index which tracks the performance of S-REITs) has risen by 32.0%, outperforming the STI (+12.7% YTD).

Given a prolonged low interest rate environment coupled with global uncertainty, we believe the chase for dividend yield plays will continue to remain relevant in the near term. Going forward, as the Singapore dollar continue to stay strong, coupled with volatility in the global market and negative real interest rates (after taking inflation into consideration), we continue to OVERWEIGHT on the REITs space as a whole but favour on office and retail REITs, with our top pick in Frasers Commercial Trust (FCOT SP; BUY; TP: S$1.41).

10-year governmental bonds yield compressed. As Singapore continues to remain as one of the few countries globally with triple ‘A’ credit ratings, the strong demand for its bonds has compressed the interest rate of Singapore’s 10-year government bond to a historical low point of 1.3%. As a result, despite the rally of S-REITs’ share price since the beginning of this year, the average 12-month forward dividend yield spread of the S-REITs sector is currently still trading at about c.50bps above the long term average.

Most REITs posted stellar results last quarter.
During the latest quarterly earnings announcements, most (except for a selected handful) REITs announced stellar earnings, including higher NPIs and DPU on a YoY basis. The REITs under our coverage posted on average +4.7% YoY and +6.1% YoY growth in NPI and DPU respectively. If Suntec REIT (which is currently experiencing a drop in DPU as a result of the AEI at Suntec City) was stripped out, average NPI and DPU growth came in at a respectable 8.1% and 8.0% respectively.

S-REITs expected to remain favourable in the near term. Going forward, as the macro picture continues to remain uncertain with interest rate remaining low; we believe S-REITs will stay favourable in the near future. In addition, as the market continues to be flooded with liquidity; result of quantitative easing by central banks around the globe, together with the lack of risk appetite amid a prolonged low interest rate environment, we believe S-REITs, particularly those with good corporate governance, strong earnings, stable payouts and high yield spread will continue to outperform.