Office S-REITs Most Vulnerable To Rate Hikes
SINGAPORE – JPMorgan analysts revealed that Singapore-listed real estate investment trusts (S-REITs) that own office properties are the most at risk of rising interest rates, as these entities are trading at the tightest capitalisation rate of about 3.5 percent, reported The Edge on Thursday afternoon (22 December, SGT).
“We anticipate the greatest risk to office property values in the event of cap rate expansion next year,” wrote JPMorgan analysts Terence Khi, Mervin Song, and Cusson Leung in a recent research note.
They explained that for every 25 basis points hike in capitalisation rates, leverage rises by 2.5 percentage points and net asset values (NAV) drop by 10 percent.
Aside from that, the analysts expect demand for office space to weaken in the next two years. Consequently, they expect overall office rents here to dip by 1 percent year-on-year in 2023 and edge up by 1 percent in the following year. Previously, they forecasted that office rents would grow by 5 percent and 3 percent in 2023 and 2024, respectively.
“A rising tide may lift all boats, but we believe defensive REITs, such as Frasers Logistics & Commercial Trust (FLT) and Keppel DC REIT (KDCREIT) with low gearing and/or exposure to structural growth in warehouse and data centres, should outperform cyclical office exposures,” they shared.
On the overall S-REIT sector, the analysts have adopted a “cautious” outlook, as they foresee a drop in distribution per unit (DPU) with declines in the next two years likely, while a potential economic slowdown would hit share price performance next year.
Specifically, they expect the industry’s overall DPU to slide by 1 percent per year, with the biggest DPU contractions for some REITs, like Mapletree Industrial Trust (MINT).
This is because the analysts expect rates to peak in March 2023. Specifically, they anticipate the US Federal Funds rate to reach 4.85 percent, the Secured Overnight Financing Rate (SOFR) hitting 5 percent, and the Singapore Overnight Rate Average (SORA) expected to be at 4.5 percent by then.
Still, their top S-REIT picks that provide relative DPU resilience ahead of the full effect of the rate hikes are FLCT, KDCREIT, Capitaland Ascendas REIT (CLAR), and Capitaland Integrated Commercial Trust (CICT).