Amid the economic uncertainty caused by falling oil prices and slowing growth in China, Singapore-listed real estate investment trusts (S-Reits) are safe havens, DBS Group Research said yesterday.
S-Reits have outperformed the local benchmark Straits Times Index and real estate developers so far this year, DBS analysts Derek Tan and Mervin Song wrote in a report.
Like many sectors, S-Reits have fallen in value, but not as sharply as most others. S-Reit unit prices are down by about 3 per cent overall since the start of the year, while the STI has plunged by a much more dramatic 11 per cent.
These trusts are likely to continue putting in a "firm" performance in the near term, the analysts wrote, especially as increasing expectations of a delay in further interest rate hikes by the United States Federal Reserve will have a positive impact on share prices in general.
The Fed lifted interest rates in December for the first time since 2006, and the DBS forecasters expect the central bank to raise rates four times throughout this year.
But the Fed has indicated that it has grown cautious after its December move, as the slump in oil prices has made it harder for it to meet its inflation targets, implying that the next rate hike could be delayed.
The longer the Fed takes to raise rates, the better for Reits as it will keep their borrowing costs low.
"While higher interest rates are a potential risk in the medium term, we remain comforted by S-Reits' conservative capital strategies... which will mitigate the impact of higher refinancing costs when it occurs," the DBS analysts said.
On average, locally listed Reits have a gearing of 34 per cent, which is "manageable", they noted.
S-Reits are trading at attractive valuations, which make it a good time for investors to jump in and lock in some yields, they added, saying that S-Reits are trading at 0.9 time price to book and offer investors a yield of 7.1 per cent.
"We believe current valuations are attractive re-entry levels and believe that large caps are likely to benefit as investors turn yield-hungry in a tepid growth environment," they said.
Their favourite S-Reits are "those with the opportunity to surprise on the upside through acquisitions or portfolio-specific catalysts", the DBS analysts added.
Their top picks are Ascendas Reit, Mapletree Greater China Commercial Trust, Mapletree Commercial Trust, Frasers Centrepoint Trust and CapitaLand Retail China Trust.