Guess which Singapore firms will be badly hit by spiking interest rates

S-REITS are in danger.

According to CIMB, should interest rates rise, losers would be companies with high net gearing and REITs. The fact that REITs have already reacted to rising bond yields does not mean that they will automatically recover to pre-selldown highs.

Here's more from CIMB:

Potential losers are REITs and highly-geared companies. The most highly-geared companies under our coverage include Olam, NOL, UEM, Swiber, Ezion, Ezra, Wilmar and Noble.

This adds to our Underweight conviction for the commodities and transport sectors. We were still bullish on the second-tier offshore and marine sectors but will now be more cautious of the impact of rising interest rates on the borrowing costs for these stocks.

We think that investors should not assume that the REITs would recover to pre-selldown highs since the yield gap has narrowed as bond yields go up.  REITs face two challenges from higher interest costs - actual DPU and valuation comparison (yield spreads).

Holistically, we prefer to chase yields from net cash companies with earnings predictability (SATS, ST Engineering, Thai Beverage) instead of the REITs.

Within the REIT space, our property analysts emphasise the need for differentiation. They take the view that one should steer clear of REITs with
higher asset leverage and those with a higher proportion of floating-rate debt.

Stocks in this category include Suntec, Keppel REIT and Cambridge. As the whole sector comes under pressure, our strategy would be to go back to quality (AREIT, FCT, MCT). We are also on the lookout for REITs with DPU growth drivers to offset higher funding costs. AREIT is our large-cap pick.

Tan Siew Ling highlighted that PLife would be the most immune from inflation-driven rate increases as its rentals are tied to inflation and will feed through every year, unlike other asset classes with lease tenure of at least three years.

However, valuations are still a tad lofty even after the selldown. Hospitality REITs have similarly short WALE but we remain concerned about RevPAU pressure from the upcoming oversupply of rooms.