• S-REITs Index fell 3.2% MoM, with the bulk of the losses coming in the last 2 weeks after the FOMC held interest rates unchanged and indicated that rates will likely remain higher for longer.
• S-REITs are now trading at a forward dividend yield of c.6.4%, 0.5 s.d. above the mean of 6.1% and a P/NAV of 0.86x, 2.0 s.d. below the mean of 1.03x. We think this could signal an attractive opportunity to reposition into S-REITs for the eventual interest rate pause and decline.
• We remain OVERWEIGHT on S-REITs but are more selective. We prefer REITs with a healthy balance sheet, strong sponsor and improving operating metrics such as the hospitality and retail sub-sector. Catalysts are expected from pick-up in the economy and asset recycling. Top picks are CapitaLand Ascott Trust (CLAS SP, ACCUMULATE, TP S$1.20) and Frasers Centrepoint Trust (FCT SP, ACCUMULATE, TP S$2.35).

SECTOR ROUND-UP

The FOMC held the federal funds rate unchanged at 5.25-5.5% on 20 Sep 23, and Fed policymakers at the median still see another 25bps hike by the end of this year. However, the updated dot plot shows rates falling by only half a percentage point in 2024. This compares with the full percentage point decrease anticipated at the meeting in June, indicating that interest rates are likely to remain higher, for longer. The decline c.5% for the S-REITs Index since the meeting suggests that part of this has already been priced in.

EC World REIT (ECWREIT SP Equity, Not Rated) has been suspended from trading since 31 Aug for not meeting its financing obligations. It has also updated that it will be unable to make distributions to unitholders and that the payment will be deferred to a later date when it has sufficient free cash. ECW Group are owed more than RMB148.8mn in overdue rent by its sponsor Forchn Holdings Group.

CapitaLand Ascott Trust’s (CLAS SP, TP S$1.20) share price has experienced a decline of c.10% from its preferential offering price of S$1.025, which was undersubscribed at 64.7%, including excess rights. The joint lead managers, bookrunners and underwriters subscribed for the remaining portion that was not subscribed. Together with the S$200mn raised through the private placement at S$1.043, gross proceeds of S$303.1mn was raised from this equity fundraising – 56.1% of which will be used to fund the c.1.8% DPU accretive acquisition of S$530.8mn in assets. Considering CLAS’s share price’s post-issue performance in this weak market, we believe REITs will hold off any equity fund-raising plans in the foreseeable future, unless as a last resort to reduce leverage, or a highly promising acquisition opportunity arises.

Retail

Aug 23 retail sales index (excluding motor vehicles) grew 3.7% YoY, extending the 0.6% growth the previous month and is now at 11.3% above Aug 19 pre-COVID levels. Most sectors recorded YoY growth, with food & alcohol (+24.1%) being the outperformer due to increased sales of alcoholic products while department stores (-5.2%) was the laggard. Excluding motor vehicles, 13.8% of total retail sales were from online channels. The F&B services index grew 8.6% YoY in Aug 23 with food caterers (+29.8%) experiencing the largest growth due to increased gatherings. We believe the gradual increase in international visitor arrivals will help to underpin retails sales growth going forward.

Hospitality

Singapore’s international visitor arrivals grew 45% YoY in Sep 23 to 1.13 mn, dipping from 1.31 mn in Aug 23 due to a drop in seasonal tourism demand post mid-year school holidays. It is still at 23% below pre-COVID September 2019. Indonesia is the top source of visitors to Singapore in Sept 23, followed by China, Australia, and Malaysia respectively. We expect China to regain its top position as a source country to Singapore as outbound travel from China continues to recover. Additionally, it’s worth noting that this year’s F1 Singapore Grand Prix in September saw a decline in visitors, with 264k attendees compared to a record high of 302k from the previous year, partly due to the closure of the Bay Grandstand. RevPAR, although down 7% MoM from its all-time highs of S$261 in Jul 23 due to seasonality, grew 26.5% YoY in Aug 23 to S$244 on the back of higher room rates and occupancy.

INVESTMENT RECOMMENDATION

OVERWEIGHT on SREITs

With the share price correction following the recent FOMC meeting, S-REITs are now trading at a forward dividend yield of c.6.4%, 0.5 s.d. above the mean of 6.1% (Figure 4) and a P/NAV of 0.86x, 2.0 s.d. below the mean of 1.03x (Figure 3). We think this could signal an attractive opportunity to reposition into SREITs for the eventual interest rate pause and decline. However, we think it will remain challenging for S-REITs (apart from the hospitality sub-sector) to grow DPU with higher borrowing costs and forex headwinds expected.

Bloomberg consensus forecasts 2023/24 SG10Y yields at 2.97% and 2.83% respectively. The dividend yield spread at 3% is 1.4 s.d. below the mean of 4% (Figure 2) due to the recent spike in the SG10Y yields to 3.4%. We see yield spread widening as the SG10Y yield starts to soften.