• Subdued DPU performance
• Uncertain outlook
• Buying opportunities from sell-down

Most REITs met our expectations

The S-REITs under our coverage have concluded their 3QCY16 results reporting. Out of the 24 SREITs we cover, only Lippo Malls Indonesia Retail Trust managed to beat our expectations. Cache Logistics Trust and CapitaLand Retail China Trust both fell short, but the remaining 21 met our expectations. In line with what we had cautioned previously, operational performance was muted, given the challenging operating environment. Overall DPU growth for the REITs under our coverage came in at -0.8% on a YoY basis. However, if we take into account significant oneoff items, adjusted DPU would instead have declined by 0.4% YoY, based on our estimates.

Probability of Dec rate hike gathered pace post-U.S. election results

The outlook for the S-REITs sector has become more cloudy post Donald Trump’s victory in the U.S. presidential election. Based on the fed funds futures rate, the probability of a rate hike in Dec has increased to 92%, from 11.8% at the start of July. Although the median projection of the fed funds rate for 2017 and 2018 was revised downwards by Fed officials during the Sep FOMC meeting, Donald Trump’s expansionary fiscal policy plans may result in interest rates rising faster than previously anticipated. Having said that, this is not without uncertainties as it remains to be seen how aggressively these policies would be pushed through and whether Congress would fully support Trump’s policies.

Maintain OVERWEIGHT on S-REITs

Although bond yields have spiked, the sharp correction in the share prices of the S-REITs sector have culminated in valuations remaining undemanding, in our view. The FTSE Straits Times REITs Index is trading at a yield spread of 462 basis points against the Singapore Government 10-year bond yield, which is 0.4 standard deviation above the 5-year average of 442 bps. We maintain OVERWEIGHT on the SREITs sector for now, and believe investors should bargain hunt on quality REITs, especially those which have underperformed the sector.

Our preferred picks are Frasers Centrepoint Trust [BUY; FV: S$2.33], Keppel DC REIT [BUY; FV: S$1.35], Ascendas REIT [BUY; FV: S$2.67], Frasers Logistics & Industrial Trust [BUY; FV: S$1.10] and Mapletree Greater China Commercial Trust [BUY; FV: S$1.15].

Source: OCBC Research - 15 Nov 2016