Market Watchers Remain Optimistic On S-REITs With US Office Assets

SINGAPORE – Despite a recent drop in unit prices due to worries over possible interest rate hikes amidst a more upbeat US economic outlook, analysts at DBS Group Research continue to be optimistic on the prospects of Singapore real estate investment trusts (S-REITs) that own office properties in the United States, reported The Edge on Friday afternoon (12 March, SGT).

Its analysts Derek Tan & Rachel Tan said S-REITs with US office assets remain appealing even though they are trading at a significant discount: around 9 percent of their yield or above 1 standard deviation, and at a yield spread of roughly 7 percent.

The duo noted that units of US Office S-REITs are changing hands at their historical average at near 1 times their Price to Net Asset Value (P/NAV) ratio.

Moreover, they revealed that DBS Group Research’s chief economist has increased its US growth forecast from 4.5 percent previously to 6 percent as macroeconomic data indicate an ongoing rebound.

“Our economists believe that the US Federal Reserve is likely to upgrade its growth outlook at its next Federal Open Market Committee (FOMC) meeting on 17 March,” said both analysts in a report dated last Thursday (12 March).

Despite the currently sluggish market, the duo stated that they are witnessing silver linings for the US Office S-REITs to prevail over near-term challenges: These include robust office occupancy levels last year, suburban office markets that remain more insulated & less affected by the pandemic, and an upbeat outlook that the United States could return to normalcy faster than expected.

Derek Tan and Rachel Tan also maintained a “buy call” on Keppel Pacific Oak US REIT (KORE), Prime US REIT, and Manulife US REIT (MUST).

“Among the US Office S-REITs, KORE has been the top performer since December 2019 led by the inclusion into MSCI Singapore Small Cap Index, while MUST has underperformed its peers since December 2019,” added the duo.