S-REITs Analysis: Performance, Prospects, and Recommendations

Date: Thursday, 21 November 2024

Broker: UOB Kay Hian

Introduction

S-REITs faced a challenging third quarter in 2024, with mixed performances across different sectors. Despite macroeconomic headwinds, some companies have managed to outshine expectations. This report delves into the performance of various S-REITs covered by UOB Kay Hian, offering insights into their market performance and strategic positioning.

Data Centre REITs

Digital Core REIT (DCREIT)

DCREIT has shown remarkable resilience by successfully leasing out 60% of its Los Angeles data centers, achieving positive triple-digit rental reversion. Management anticipates reaching 80% occupancy by year-end. This strategic leasing has positioned DCREIT well, enabling it to capitalize on the rising demand driven by generative AI. The recommendation for DCREIT is a BUY with a target price of US\$0.95.

Keppel DC REIT (KDCREIT)

KDCREIT has achieved a significant positive rental reversion exceeding 40% for a major colocation contract in Singapore. This gain reflects its strategic foresight in rebalancing its portfolio to adapt to evolving technological trends. The investment in yen-denominated loans to fund acquisitions has also stabilized its cost of debt. KDCREIT is recommended as a BUY with a target price of S\$2.64.

Retail REITs

Frasers Centrepoint Trust (FCT)

FCT has demonstrated resiliency with Causeway Point and Northpoint City maintaining high occupancy rates of 99.8% and 100.0%, respectively. The positive rental reversions of 8.8% and 6.9% underscore FCT’s robust market position. The trust plans to proceed with asset enhancement initiatives (AEI) for NEX and Hougang Mall. FCT is recommended as a BUY with a target price of S\$2.79.

Lendlease Global Commercial REIT (LREIT)

LREIT maintains a positive double-digit rental reversion of 11.4% on an average versus average basis. Its properties, 313@Somerset and Jem, continue to attract strong tenant demand. The commencement of construction for a multi-functional event space at Grange Road Car Park further enhances its portfolio. LREIT is recommended as a BUY with a target price of S\$0.77.

Logistics REITs

Frasers Logistics & Commercial Trust (FLT)

FLT has thrived in Australia with positive rental reversions of 39%, 58.1%, and 31.1% in New South Wales, Victoria, and Queensland, respectively. These gains have restored occupancy in Australia to 100%. However, the China portfolio suffered a negative rental reversion of -12.2%, and this weakness is expected to persist. FLT is recommended as a BUY with a target price of S\$1.44.

Hospitality REITs

Far East Hospitality Trust (FEHT)

FEHT benefitted from a surge in Chinese tourists, capturing a larger market share. Chinese guests accounted for 20% of its hotel guests, significantly higher than pre-pandemic levels. This increase has positively impacted the upscale and mid-tier hotel segments. FEHT is rated OVERWEIGHT with a BUY recommendation and a target price of S\$0.82.

Office REITs

Suntec REIT (SUN)

SUN faces challenges from valuation losses in its Australian portfolio due to cap rate expansion. The interim valuation of its office properties in the Makuhari sub-market of Chiba, Japan, resulted in a reduced valuation by 17%. Despite this, the trust continues to demonstrate market strength with a HOLD recommendation and a target price of S\$1.18.

Diversified REITs

CapLand Integrated Commercial Trust (CICT)

CICT has achieved a 5.4% year-on-year increase in net property income for 3Q24, reflecting its diversified and resilient portfolio. It remains well-positioned to leverage its scale and market presence, earning it a BUY recommendation with a target price of S\$2.59.

Conclusion

The S-REIT sector presents a mixed landscape with opportunities and challenges. While macroeconomic factors pose potential risks, strategic positioning and market adaptability have enabled several REITs to maintain robust performances. Investors are advised to consider these factors along with the targeted recommendations provided by UOB Kay Hian.