• The S-REITs Index performance was lacklustre in May. It declined 0.4% after falling 3.1% in April. The top performer for the month, CapitaLand India Trust (CLINT SP, non-rated), gained 6%, while the worst performer, Frasers Hospitality Trust (FHT SP, non-rated), fell 6.5%. The overseas commercial sub-sector was the top performer in May, gaining 1.8%, while the worst performing sub-sector was overseas diversified, which was down 2.1%.
• S-REITs are now trading at a forward dividend yield spread of c.3.1% (-1.3x s.d.) and a P/NAV of 0.85x (-2.1x s.d.).
• We remain OVERWEIGHT on S-REITs but are selective. We favour REITs with a healthy balance sheet, strong sponsors, and improving operating metrics, such as REITs in the hospitality and retail sub-sector. Catalysts are expected from a pick-up in the economy, asset recycling, and interest rate cuts. CapitaLand Ascott Trust (CLAS SP, ACCUMULATE, TP S$1.04) and Cromwell European REIT (CERT SP, BUY, TP €1.91) are top picks.

SECTOR ROUND-UP
The Fed kept the federal funds rate unchanged at 5.25-5.5% for the seventh consecutive meeting on 12 June and now projects only one rate cut in 2024. It will need to see further positive signs that inflation is moving towards its 2% target before considering any rate cuts. With lower interest rates, S-REITs will benefit from 1) lower financing costs, 2) higher dividend yield spreads over bonds, and 3) higher property valuations as cap rates compress. Furthermore, we expect deal-making to pick up pace with the peaking of interest rates. Therefore, we expect a sector recovery in 2024-2025.

Retail
The April 24 retail sales index (excluding motor vehicles) fell 4.5% YoY, compared to the 2.1% growth in March 24. Most industries recorded YoY declines, with the wearing apparel & footwear industry the biggest decliner at 16.2%. Department stores and mini marts & convenience stores sales fell 8.5% and 7.4% respectively. Sales of food & alcohol was the largest gainer, recording a 4.7% YoY growth.

The F&B services index rose 0.3% YoY in April 24, extending the 4.9% growth in March 24. Food caterers and cafes, food courts & other eating places registered a 21.3% and 4% growth in sales, respectively. Sales for restaurants and fast-food outlets fell 7.5% and 0.7% respectively. We think retail sales will remain resilient in 2024, boosted by the various government handouts and the increase in international visitor arrivals.

Hospitality
Singapore’s international visitor arrivals grew 15% YoY in May 24 to 1.28mn. It is still 14% below pre-COVID levels (Figure 8). Chinese travellers are returning to Singapore after the 30- day visa-free entry for Chinese citizens was rolled out on 9 February 2024. Visitor arrivals from China grew 133% YoY in April 24 and are now 22% below pre-COVID levels.

RevPAR continued to grow (+3% YoY) in April 24 after gaining 20% YoY in March 24, supported by higher average daily room rates (+3% YoY). This was lifted by events such as the Bruno Mars three-night concert in early April at the Singapore National Stadium. We think RevPAR will continue its growth trajectory in 2024 with a solid concert line-up and a packed MICE schedule in Singapore.

Source: Phillip Capital Research - 24 Jun 2024