Excerpts from analysts' report
Deutsche Bank analysts: Joy Wang & Chien-Fie Man
Valuations undemanding, limited downside risk Bugis Village is a property of CapitaLand Commercial Trust: Bugis Village comprises 34 restored pre-war shophouses. Photo: CapitaLand Commercial TrustSREIT have retreated significantly following recent market volatility, trading at 0.2 s.d. wider than the average yield spread over 10-year government bonds, 0.9x historical book, pricing in potential rate rise expectations and increasing sector volatility. While medium-term fundamentals remain challenging with rising supply and declining demand, we see limited downside to the sector, given strong yield support and undemanding valuation. We upgrade CCT (CapitaLand Commercial Trust), MCT (Mapletree Commercial Trust) and MLT (Mapletree Logistics Trust) to Buy from Hold. Yield stability and book value resilience will be the key near-term drivers and we change our top picks to MCT and CT. |
Limited DPU impact from rising rates, cap rate expansion expected
Revisiting our analysis on the impact of rising rates on DPUs, we estimate a 0- 2.75% impact, with KREIT, Suntec and OUEHT the most vulnerable to rising rates, given their higher leverage and lower hedge ratios. CT and Keppel DC are the least exposed, given their higher weighted average costs and significant hedge ratios.
We also expand our cap rate assumptions by 0-50bps on the back of rate increase expectations and revise our RNAV estimates by 0- 16%. We note that a 50bps cap rate expansion would affect the sector’s book NAV by 14% and see increased capital raising risks for REITs such as KREIT.
Modest rate increase in the price
Currently, the REITs are trading 33bps wider than LT average spreads, pricing in a rise in interest rates slightly below our economist’s expectation for the 10- year yield to rise to 3.1% from 2.6%. The relative spread of 426bps is broadly in line with spreads seen at the beginning of the year. We estimate that every 25bps change in the 10-yr yield would see DDM valuations affected by c.4%.
Upgrading CCT, MCT, MLT to Buy, adjusting earnings +3/-4%
We have raised our risk free rate to 3.1%, in line with our economist’s 10-yr bond forecast and our sector beta to account for greater volatility. As a result, we reduce our target prices by 4-15%. We have also adjusted our DPU forecasts by +3/-4% taking into account recent transactions and results.