• Weaker DPU performance
• More optimistic economic data points
• KDCREIT as potential laggard play

Expectations largely met for 4QCY16 results

The 24 S-REITs under our coverage have concluded their 4QCY16 results reporting. Lippo Malls Indonesia Retail Trust (LMIRT) beat our expectations for a second consecutive quarter, driven by a larger-than-expected realised gain on hedging contracts. On the other end of the spectrum, Starhill Global REIT missed our expectations as NPI margins came in lower than our forecast. The remaining 22 S-REITs we cover met our expectations.

Overall DPU growth for the quarter saw a negative 2.0% YoY fall. This was partly impacted by equity fund raising (EFR) exercises by Keppel DC REIT and OUE Hospitality Trust, resulting in an enlarged unit base, although more meaningful contribution from acquisitions funded by the EFR proceeds will only come in this year.

The standout performers in 4QCY16 were CapitaLand Commercial Trust (DPU +10.1% YoY), Viva Industrial Trust (DPU +7.7% YoY) and LMIRT (DPU +7.4% YoY).

Operating environment remains challenging, but some bright spots seen

While we continue to maintain our cautious view on the operational outlook of the S-REITs sector, we note that there were some bright spots seen over the past few months across most of the sub-sectors. Within the office space, a second consecutive quarter of positive net absorption islandwide was recorded in 4Q16. For retail, retail sales growth excluding motor vehicles came in at 0.3% YoY for the month of December, the first positive monthly YoY growth since January 2016. As for the industrial sub-sector, Singapore’s PMI has stayed above 50 for three straight months, with January’s 51.0 reading the highest since November 2014.

S-REITs can still warrant a strategic position in investors’ portfolio

During our REITs strategy report published on 7 Dec 2016, we recommended investors to position for bargain hunting opportunities when the sector experiences a pullback. Since then, the FTSE ST REIT Index (FSTREI) has delivered a total return of 4.0%. The FSTREI is currently trading at a forward yield spread of 411 bps against the Singapore Government 10-year bond yield, which is approximately half a standard deviation below the 5-year average (433 bps). However, given uncertainties over the geopolitical environment and sustainability of the global economic recovery, we believe S-REITs can still warrant a strategic position in investors’ portfolio.

Maintain OVERWEIGHT on the SREITs sector. Our preferred picks are unchanged: Frasers Logistics & Industrial Trust [BUY; FV: S$1.08] and Mapletree Greater China Commercial Trust [BUY; FV: S$1.08]. In terms of positioning, we see KDCREIT as a potential laggard play following its recent share price underperformance, supported by its healthy valuations and expected strong FY17F DPU growth.

Source: OCBC Research - 6 Mar 2017