The S-REITs sector has come under some selling pressure in recent weeks given the sudden and sharp spike in sovereign bond yields. This leaves us more cautious on the sector in the near-term as sentiment over yield sensitive instruments weakens and we expect further volatility in the months ahead, with potentially more selling pressure.
We observe that there has historically not been a clear correlation between the FSTREI and 10-year Singapore government bond yield. However, a sudden and sharp spike in bond yields can cause an initial negative knee-jerk reaction in the share prices of S-REITs.
In the past three episodes when this happened since 2013, we have subsequently seen a 15% to 21% rebound in the sector from the trough over a 12-month period once bond yields stabilise. Hence, although the sudden surge in bond yields this year is a concern, investors should also focus on the underlying drivers such as a stronger economic outlook, which would support the recovery of the operational performance of S-REITs and drive a potential sector re-rating.
In terms of valuations, given the spike in bond yields, the current forward yield spread between the FSTREI and the 10-year Singapore government bond yield has now compressed to 395 bps, which is below the 10-year average.
For investors looking for exposure to the sector, we would position with a recovery basket comprising retail and hospitality REITs given that we have already seen a more meaningful rotation to value and cyclical stocks globally: Ascott Residence Trust [BUY; FV: SGD1.24], CapitaLand China Trust (CLCT SP) [BUY; FV: SGD1.58], Frasers Centrepoint Trust (FCT SP) [BUY; FV: SGD2.95], Mapletree Commercial Trust (MCT SP) [BUY; FV: SGD2.18] and Mapletree North Asia Commercial Trust (MAGIC SP) [BUY; FV: SGD1.06].
For investors with a longer-term horizon, we would be buyers on dips of high-quality S-REITs which are expected to be beneficiaries of secular growth trends with room for solid inorganic growth opportunities.
Preferred picks within what we term as our resilient basket would be: Ascendas REIT (AREIT SP) [BUY; FV: SGD3.89], Frasers Logistics & Commercial Trust (FLT SP) [BUY; FV: SGD1.62], Keppel DC REIT (KDCREIT SP) [BUY; FV: SGD3.51], Mapletree Industrial Trust (MINT SP) [FV: SGD3.51] and Mapletree Logistics Trust (MLT SP) [BUY; FV: SGD2.17].
Over the next 9-12 months horizon, we would expect our recovery basket to outperform our resilient basket.
Source: OCBC Research - 11 Mar 2021
