S-REITs raised $4b YTD amidst acquisition fever

But large deals are expected to be rarer and reduce yields to at least 3%.

S-REITs have raised close to $4b, excluding initial public offerings (IPOs), in the last five months, which has been one of the busiest periods for S-REITs since 2011, DBS Equity Research revealed. Most of the proceeds have been channelled into acquisitions, which cements a steady 1-2% rise in distribution per unit (DPU) over 2018 to 2019.

However, since April 2018, the S-REIT index is down 2.4%, partially attributed to investors pricing in the impact of four rate hikes and the rotation amongst various S-REITs in view of the strong take-up seen in recent fundraisings.

DBS analyst Mervin Song commented, "Looking ahead, whilst the timing of further fundraisings is hard to predict, we believe the majority of the large equity raisings are likely behind us. With nascent signs of a sustainable recovery in the Singapore property market boosted by an inorganic strategy, in our view, should result in S-REITs in rallying with yield spreads compressing to 3.0% from 3.4% currently."

Also read: Fundraising for acquisitions slashed S-REITs' distribution per unit by 2.6%

Following the recent correction and increase in 10-year Singapore bond yield, the spot yield spread has reduced to 3.4% below mean yield spread of 3.8%. "We believe once investors refocus on the recovery in DPU and a multi-year upturn in various property markets, the yield spread will compress from here," Song added.

However, green shoots in the S-REIT landscape continue to emerge. Song noted that the muted S-REIT performance and a YoY decline in DPUs for several REITs owing to the negative impact from the oversupplied market over the past few years belies the turnaround in the Singapore property market.

Song said, "Leading the way is the office sector with Grade A CBD office rents rising faster than expected to $9.70 psf per month (+3% QoQ; +8% YoY) and close to our year-end target of $10 psf/month."

Leasing enquiries have picked up and this trend is also starting to occur in the industrial sector, the analyst noted. "Supply of industrial space remained elevated in 2017 but will drop by close to 50% from 2018 onwards. That said, most of the supply is still coming from the warehouse and factory segment and will need time to be absorbed," he added.

The retail sector, which many investors have shunned, is showing "green shoots" with a rebound in retail sales, as CapitaLand Mall Trust (CMT) reported positive rental reversions in over a year.

"Finally, hotels in Singapore are reporting a YoY increase in revenue per available room (RevPAR) for the first time in over two years," Song concluded.