SREITs – CIMB

Who is the strongest of them all?

Given the strong fundamentals, we are of the view that the S-REIT market is well positioned against potential interest rate hikes. Though we maintain a Neutral view on the sector, we believe REIT such as FCT is more resilient than others and offer stable yields amid a rising interest rate environment.

Amid a rising interest rate environment, we examined the resilience of the S-REITs under our coverage through analysing their respective 1) gearing, 2) debt profile, 3) sensitivity of DPS to rising interest rates, and 4) current yield spreads. Our top pick remains FCT (TP: S$2.05) for its defensiveness and strong fundamentals. Our other favourites include AREIT and CDL-HT.

A well-positioned sector

Rising leverage ratios and interest rates are commonly deemed to be the key detrimental factors to the S-REIT market. Our interest rate sensitivity study revealed that the DPS for REITs could be negatively impacted by 1.8% in FY15 and 1.7% in FY16, if interest rates were to rise by 50bp p.a. over the next three years. On this basis, we are of the view that the DPS paid out by the S-REIT sector could still be sustainable amid a potential hike in interest rates going forward.

Stronger debt profile

Although the S-REIT sector leverage ratio at 33.4% is similar to the level before the global financial crisis of 2008, debt profiles are fundamentally stronger now in light of the 1) longer debt profile, 2) larger diversity of sources of funds, and 3) amount due to be renewed is less ‘lumpy’, accounting for less than 30% of the total debt (as a sector) due for refinancing in any one year – the risks for refinancing are relatively low, in our view.

Favour FCT

Although we remain Neutral on the S-REIT sector on the back of a rising interest rate environment, FCT remains our top pick for being the most defensive in terms of fundamentals. Similarly, AREIT has a strong defensive debt profile while CDL-HT currently offers the most attractive P/BV and biggest deviation from its historical yield spread.