S-REITs: Maybank-KE maintains Underweight on REITs, underscoring that it remains in a derating phase.
The house argues that REITs are unlike fixed income, highlighting that dim economic prospects raise the spectre of declining occupancies and weaker rent reversions. To be sure, the fact that interest rates are rising is an additional negative.
Compounding weak demand is strong supply from 2016-18 for all sub-sectors: 2x historical demand for retail, 1.4x Office, and 1.2x industrial, making industrial the cleanest dirty shirt.
Supply for industrial should taper below demand in 2017-18, while for retail, supply could exceed demand throughout. The house also expects occupancy and rent reversions to be more challenging for retail and office than for industrial.
Valuations suggest that industrial REITs have priced in the most downside as Ascendas REIT and Mapletree Industrial Trust are trading slightly below their target yields, while AA REIT and Cache are above.
For exposure, Maybank-KE advocates hiding in Industrial REITs, to which the house prefers AREIT (63% exposed to business parks and warehouses, which faces the tightest supply) and MINT (improving occupancies despite a challenging factory market).
In the office space, much of downside also seems discounted, as CCT and KREIT are trading slightly below target yields. The exception is Suntec REIT.
Retail REITs, CMT, MCT and FCT are trading way below target yields, suggesting downside of 11.5-13.3%.
The house has the following ratings on REITs:
CMT: Sell, TP $1.66
MCT: Sell, TP $1.11
FCT: Sell, TP $1.63
CCT: Hold, TP $1.25
Keppel REIT: Hold, TP $0.90
Suntec REIT: Sell, TP $1.33
AREIT: Hold, TP $2.28
MINT: Hold, TP $1.49
Cache: Hold, TP $0.95
AIMS AMP: Hold, TP $1.47