Top picks are retail and hospitality REITs: DMG & Partners Research

Retail REIT with prime suburban exposure is favoured due to strong positive rental reversion.

Here’s DMG & Partners Research’s take:

Rising inflation, low interest rate, and economic uncertainties are boon to S-REITs. Rising food, transport, and housing costs are likely to keep inflation high for a while in Singapore which saw CPI rose 5.2% YoY in 1Q11. With high inflation, S-REITs stand to gain from 1) rising spot rents, and 2) higher valuation of underlying properties. On the other hand, low interest rate environment (3m SIBOR: 0.4%) in Singapore, coupled with global economic uncertainties amidst unresolved issues caused by the global financial crisis, have resulted in reduced risk appetite. Given that S-REITs offer attractive dividend yield of 6.9% and inflation-protection features, we are OVERWEIGHT on the sector.

Rising spot rents to cushion negative rental reversion of office space, and raise positive rental reversion for others. Spot rents of industrial, office, and prime suburban retail space, have been rising sequentially for four consecutive quarters since 2Q10. We believe spot rents of non-residential properties, with the exception of urban retail space, will continue to rise further, underpinned by strong Singapore economy estimated to grow 5-7% YoY in 2011. Riding on the improving spot rents, S-REITs are set to enjoy better rental reversions, except for office REITs which are experiencing negative rental reversion in 2011.

Increasing tourist arrivals and high hotel occupancy to boost Average Daily Room Rate (ARR). Singapore’s tourism industry is set for multi-year boom with tourist arrivals projected to grow at 7.9%/year during 2010-2015 to hit 17m. This has resulted in high hospitality occupancy rate of 86% in 2010 (+9.8ppt YoY). We believe Singapore’s hospitality sector will continue to benefit from the strong tourism growth as a result of high occupancy rate and rising ARR.

Top picks are retail and hospitality REITs. We favour retail REIT with prime suburban exposure due to strong positive rental reversion as well as its defensive nature. Our top pick is Frasers Centrepoint Trust (FCT SP; BUY; new TP: S$1.77). On the hospitality front, we favour CDL Hospitality Trusts (CDREIT SP; BUY; TP: S$2.46) to benefit most from Singapore’s tourism boom.

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