• Focus in 2015 will be on interest rates
• Sector valuations not cheap
• CMT, FCT and Starhill Global REIT our top picks

Year in review

2014 has been a relatively solid year for the S-REITs sector. The FTSE ST REITs Index (FSTREI) has shown an appreciation of 7.8% YTD, outperforming the STI’s 2.4% increase during the same period. Operationally, we note that most REITs under OIR’s coverage have managed to report decent financial results for 9MCY14. Overall NPI, distributable income and DPU growth came in at 7.6%, 6.5% and 2.2%, respectively. From a regulatory standpoint, MAS released a consultation paper in Oct with proposals aimed at fostering stronger corporate governance practices, better aligning the interests of REIT managers and unitholders, as well as to provide REITs with more operational flexibility.

All eyes on interest rate movements

During the most recent FOMC meeting this month, the Fed maintained its dovish stance on monetary policy. Nevertheless, market expectations point towards a hike in the Fed Funds target rate in 2Q15. Consequently, this would likely influence the Singapore Government 10-year bond yield and SIBOR to increase, and could result in volatility in the share prices of S-REITs. On a positive note, most REITs have buffered up their balance sheets to keep gearing ratios at relatively comfortable levels post the Great Financial Crisis (GFC), while hedging strategies have also largely been put in place. Moreover, evidence suggests that over a longer time horizon, there is no clear-cut inverse relationship between the Singapore Government 10-year bond yield and the share price performance of S-REITs. The correlation of the two came in at only -0.11 from Sep 2002 to date.

Maintain NEUTRAL on S-REITs sector

In terms of valuations, the FSTREI is trading above historical levels on a P/B basis (forward P/B of 1.02x is ~0.5 standard deviation above its 7-year mean of 0.93x). The yield spread of the FSTREI over the Singapore Government 10-year bond yield currently stands at 4.0%, which is below the 7-year average of 4.7% (4.3% if we exclude the GFC period). We have OVERWEIGHT ratings on the office and retail REITs subsectors, and NEUTRAL ratings on the industrial, hospitality and healthcare REITs sub-sectors. Overall, we maintain NEUTRAL on the S-REITs sector. Our top picks are CapitaMall Trust (CMT) [BUY; FV: S$2.20], Frasers Centrepoint Trust (FCT) [BUY; FV: S$2.08] and Starhill Global REIT [BUY; FV: S$0.90].

Source: OCBC Research - 20 Dec 2014