SREITs – CIMB

It’s getting “too hot”in here

We turn non-consensus Underweight on S-REITs. We find valuations un-compelling after the sector’s outperformance. Given rising valuations and low funding costs, we see risks from overpaying, riskier investments and capital-raising as pressure to grow intensifies.

Our picks are geared towards those with higher growth visibility from past AEIs/developments and less risk of expensive or riskier investments. We downgrade CCT and Suntec after their YTD outperformance and upgrade AREIT. Top picks are AREIT and MCT.

It’s getting “too hot”

Whilst above-average yield spreads have been a commonly-cited reason for further yield compression, this can only continue with sustained risk aversion. Risk indicators are, however, turning a net positive, which could prompt investors to switch out of defensive yields. This is particularly so with the sector unlikely to see the strong growth akin to 2004-8 given increased caution towards leverage and acquisitions post global financial crisis. Interest rates are also near the 0%-bound, with upside risks over the longer term. With spreads now just 50bp above the historical average, we think that it does not pay to get too bearish and continue hiding in yields.

Growing for the sake of growing?

As trading valuations rise and make accretive acquisitions easier, pressure to grow could increase. More could thus wind up overpaying for acquisitions or venturing into riskier greenfield developments or overseas purchases in search for higher returns. More equity fund-raisings could also follow, especially with sector gearing heading up to 35% levels. There has in fact an emerging trend of opportunistic equity fund-raising without accompanying new acquisitions or AEIs, which could lead to near-term dilution.

Time to take the heat off

Give poor risk-rewards and risks from acquisitions, we turn a non-consensus negative on S-REITs and downgrade the sector from Overweight to Underweight. We downgrade CCT and Suntec and upgrade AREIT. Our top picks are now AREIT and MCT.