• Flattish 2QCY16 performance
• Weakness in industrial and hospitality sectors
• Interest rate environment to remain accommodative

2QCY16 results largely met expectations

During the recently concluded 2QCY16 earnings season, out of the 23 S-REITs under OCBC Investment Research’s (OIR) coverage, only OUE Hospitality Trust and Ascott Residence Trust (after stripping out a one-off gain) reported results which fell short of our expectations. The remaining 21 REITs met our expectations. Overall DPU growth for these REITs was flat (- 0.1%) on a YoY basis.

The notable strong performers came from OUE Commercial Trust (OUECT), Lippo Malls Indonesia Retail Trust and Mapletree Greater China Commercial Trust, which registered YoY DPU growth of 34.7%, 16.4% and 9.1%, respectively. For OUECT, it should be noted that the huge jump in DPU was attributed to the dilution caused by a rights issue in 2Q15 before the One Raffles Place acquisition kicked in.

Operational challenges remain

Looking ahead, we believe macroeconomic uncertainties and supply concerns would continue to exert pressure on the operational performance of REITs. This is broad based across the various sectors, although some REITs have proven to be resilient. In addition, many REIT Managers are making use of the soft environment to carry out asset enhancement initiatives and/or redevelopment works to reposition their assets for the future. For example, Funan DigitaLife Mall will be redeveloped into an integrated development by CapitaLand Mall Trust. These projects would result in a fall or loss of income contribution in the near future. Hence, we expect DPU growth to remain muted.

OVERWEIGHT view intact

We believe the recent FOMC Jul meeting minutes released supports our thesis that there will be a structural shift towards a prolonged period of accommodative interest rates. Based on the fed funds futures rate, the probability of at least one rate hike by the end of the year stands at 51.0%.

We reiterate our OVERWEIGHT rating on the SREITs sector, with Frasers Centrepoint Trust [BUY; FV: S$2.32], Keppel DC REIT [BUY; FV: S$1.30] and Ascendas REIT [BUY; FV: S$2.66] as our top picks. G

iven our positive view on the sector, we also add SPH REIT [BUY; FV: S$1.05] and Mapletree Greater China Commercial Trust [BUY; FV: S$1.18] into our preferred picks list.  

Source: OCBC Research - 23 Aug 2016