SREITs – DBSV

Refocusing on growth

• S-REIT valuations fair but ample liquidity should sustain interest

• Acquisitions a likely theme for 2013; up to S$5.7bn in assets could be purchased

• Focus on S-REITs with acquisition drivers. Picks are MCT, MLT and FEHT

S-REIT valuations fair and not compelling, however abundant liquidity should sustain interest in the sector. After a year of yield-compression led outperformance in share prices, the S-REITs sector now trades at a weighted average FY13F yield of 5.8% and a P/BV of 1.13x. While we believe the S-REITs are fairly valued at these levels, interest in the sector is likely to remain firm. This is because of the strong S$, a sustained low interest rate environment, and sector yields supported by yield spreads of 450bps above long bonds, which are still fairly decent. This could mean that capital allocations within the S-REITs sector are likely to remain high.

Acquisitions a likely key theme in 2013; potential S$5.7bn of assets might be on offer. To combat inflationary pressures which are expected to remain high in 2013, we believe investors are likely to turn from being “yield-hungry” to “growth-focused”. With organic growth prospects looking modest and most S-REITs trading above their respective NAVs, we believe that acquisitions will be a key theme in 2013. We prefer S-REITs with the ability to make accretive acquisitions (adjusted for leverage ratios remaining stable) and see possibilities coming from the sponsored REITs given their visible pipelines and REITs with regional mandates. Based on announced and potential pipelines, assuming all potentials are executed upon, we could see up to a total of S$5.7bn of asset transactions in 2013.

Our key calls. We advocate a selective stance in the SREITs with a preference towards those offering superior total returns compared to peers with potential acquisitions as an added upside to forecasts. Our picks are MCT, MLT and FEHT.

Potential downside risks.
Heightened risks to occupancy rates (which we believe to be minimal at this juncture); lower-than-expected rental reversions, earlier than expected interest rate hikes (base case early 2015).