Here's why you should invest in REITs
DBS reveals 5 REITs with limited potential in yield compression.
Here's more from DBS:
Roll forward STI valuation to capture 2013’s growth. Mediocre earnings in 2012 will be a non-event. We roll forward our STI target, pegged to 2013 earnings, to capture recovery trades in cyclical sectors. Based on 13.3x (-0.5SD) on 2013 earnings, STI’s target valuation is 3200.
Awaiting further policy moves. Mid-September could turn out to be an eventful period. The German constitutional court will rule on the legality of the ESM on September 12 while the FED heads for the next FOMC meeting on September 13 standing ready to provide additional measures when needed. Meanwhile, Asian central banks have more flexibility to fine tune monetary policies as these have been tightened much more than relaxed since 2010 and as inflation pressures ease.
Top slice selected REITS and Telcos. We advocate investing in yield plays since March 2012. Our yield picks – primarily REITs and telecoms stocks have outperformed on a 3 to 6 month basis. Yield gap for REITs has compressed from 6% in March 2012 to the current 4.5%. We prefer to be selective on yield plays and will top slice REITs where we see limited potential in yield compression– CapitaMall Trust, Capita Commercial Trust, Cache Logistics, CDL Hospitality and Ascendas India Trust.
Singtel was downgraded in July on weak earnings from Bharti due to high competition in India and the weak Rupee. Together with recent downgrade by Moody’s, these will cap SingTel’s share price performance in the near term.
Switch to cyclical stocks with earnings visibility… We believe it is still early to add cyclicals in the transport and commodities related sectors which are vulnerable to the weak global economy. We prefer to add positions in cyclicals with earnings visibility, which are found mainly in oil and gas proxies. These are companies are backed by strong order books for projects - Keppel Corp, SembCorp Marine, ASL Marine, STX OSV, Ezion - or high level of steady income - CMA, GLP - while Tat Hong is riding high on
the upturn in the regional construction industry.
…or bombed out cyclicals. W e reiterate our buy calls for Tiger, a turnaround play with its operations in Australia in full swing by October 2012. Biosensors’ remain a steal for a company with 30% earnings growth and strong competitive advantage. Yangzijiang is a well managed shipyard, trading at undemanding PE of 5x and backed by dividend yield of 6.2%.