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Getting Defensive With REITs (Part 1)

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Tides seemed to have turned and the market appears to be on the verge of a correction. The outlook for December is getting ominous and investors should be prepared. According to RHB, it is now time to start getting defensive with REITs as the macroeconomic environment becomes more volatile amidst the threat of faster rate hikes from the Fed.

RHB: REIT Outlook By Sub-Sector

  1. Hospitality

Hospitality REITs have been underperforming over the last two years due to a steady decline in hotel revenue per available room (RevPAR) post the 2012 peak. RHB notes that this decline was mainly driven by high hotel supply growth. For the last four years, hotel supply in Singapore has been growing at 4-5 percent per annum, which exceeds the 1-3 percent demand growth. However, going forward, RHB believes that the hospitality sub-sector is now in a sweet spot.

Based on the latest figures from Singapore Tourism Board, RevPAR has bottomed out in 2017 and rebounded year-to-date. With the supply effects tapering from this year and demand drivers remaining robust, the hospitality sub-sector is now at the start of a multi-year recovery.

Among the hospitality REITs, CDL Hospitality Trusts is the top pick for RHB for its strategic hotel positioning across the island, which will help in tap into leisure and corporate travel growth. Another REIT that RHB recommends is OUE Hospitality Trust, which is a pure-play in the domestic hospitality sector and is also expected to benefit from robust tourism growth.

  1. Industrial

Despite the ongoing US-China trade war, the domestic manufacturing sector has been holding up fairly well. This is evident from the sustained growth momentum in Singapore’s Manufacturing Purchasing Managers Index (PMI), which expanded for the 25 straight months. Overall, RHB expects domestic industrial rent to increase by 1-5 percent for 2018 and 2019. RHB recommends looking at business parks and high-tech segments as early cycle plays while the logistics segment remains as late cycle play.

A-REIT has been identified by RHB as its top pick for the industrial sub-sector for its well-diversified industrial property exposure. Its efficient capital recycling strategy and inorganic growth potential from recent acquisitions are also reasons why RHB favours the REIT. In the logistics space, RHB expects Cache Logistics Trust to benefit from the logistics sector turnaround in 2019.

  1. Office

According to RHB, office REIT sub-sector has favourable dynamics supported by both supply and demand factors. Based on data from CBRE, the future supply of office space from 2H18 to 2021 is estimated to be lower than the 10-year average supply. In addition, office demand has remained healthy, driven by a few key main tenant segments: co-working space operators, and technology and insurance companies.

However, with most of leases not yet up for renewal, the positive impact on DPU growth will not be felt until 2020. As such, RHB remains neutral on the office sub-sector. For investors looking to invest in the office sub-sector, RHB recommends buying CapitaLand Commercial Trust on weakness.

  1. Retail

Despite the slight uptick in retail sales in recent months, sentiment on the ground remains weak. RHB notes that this is due to the fast-changing consumer trends and e-commerce threat. With slightly more than average retail supply coming online, retail rent growth should continue to be limited in months to come. Amidst the challenging environment, RHB expects only well-positioned defensive suburban malls to register decent performances.

For investors looking for retail exposure, RHB recommends Frasers Centrepoint Trust due to the upside from asset enhancements, as well as its stable suburban mall portfolio, solid balance sheet, and acquisition potential.

Investors Takeaway: RHB’s Top 5 REIT Picks

Due to lingering concerns over rising interest rates, RHB does not expect a broad-based sector outperformance. However, RHB remains confident that being selective on S-REITs can still offer value to investors. According to RHB, investors should continue to favour S-REITs with stock-specific catalysts as these are REITs that will continue to find favour amongst investors.

  1. A-REIT (BUY, TP $2.90)
  2. CDL Hospitality Trust (BUY, TP $1.80)
  3. Manulife US REIT (BUY, TP US$0.92)
  4. OUE Hospitality Trust (BUY, TP $0.80)
  5. Starhill Global REIT (BUY, TP $0.80)

In the next part of this series, we will dive into RHB’s top five REIT picks and why they stand out among their REIT peers.

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