REITS

REITS: The Business Times (BT) highlighted that the unclear timing of the Fed interest rate hike is causing price volatility in REITs, with consensus now pointing towards a 25bps increase in Sep.

While REITs have hedged ~80% of all their borrowings, analysts remain dividend as to whether prices have already reflected the prospects of any rate spike.

To navigate the sector going forward, analysts are advocating a bottom-up approach to pick REITs with strong balance sheet, good capital management, DPU growth and higher percentage of hedged debt.

Some analysts commented that any selldown on a rate hike will be “more of a relief” rather than a clear downside trend, and unlikely to be significant, as most of the risks will have been priced in.

Key trends of the REIT sector:
1) Office REITs - Biggest laggard year-to-date (-7%) with the sector facing 4m sf of new supply by end-2016.
2) Industrial REITs - Faces an oversupply situation and restrictions on strata sub-division, seller stamp duties and longer minimum occupation periods.
3) Retail REITs - Pressured by higher labour costs and rising online competition.
4) Hospitality REITs - Hit by dwindling tourist arrivals, with visitors down 5.4% y/y in the first four months of 2015, weighed by weakening regional currencies.

Overall, Maybank-KE has an Underweight rating on S-REITs due to the deteriorating fundamentals amid ample supply, softer demand, rising interest costs and stretched valuations.

Top Sells are CapitaLand Mall Trust (TP: $1.87) and Ascendas REIT (TP: $2.27). Preferred Buys are Mapletree Industrial Trust (TP: $1.77), Cache Logistics Trust (TP: $1.33), Starhill Global REIT (TP: $0.93) and Keppel REIT (TP: $1.32).