- APAC REITs are poised to benefit from higher rents and stronger demand in 2023 as economic headwinds ease
- Valuations are attractive and APAC REITs continue to be a good source of regular income
- UOBAM favours a balance of growth and defensive REIT sub-sectors
After falling 21 percent in 2022, APAC REITs have started the year on solid footing. Sentiment has been buoyed by easing inflation expectations and a moderation in US Treasury yields.
Figure 1: APAC REITs vs US Treasury yield
Note: APAC REITs – FTSE EPRA NAREIT (ENHPU Index) UST 10Y – US 10-year Treasury yield
Source: Bloomberg as at 8 Feb 2023, UOBAM
Better times ahead
Despite the recent pullback, there are several reasons for optimism from both a capital gains and dividends perspective:
- As Figure 1 shows, there is a tendency for REITs to be negatively correlated to interest rates in a slowing growth scenario. Investors are now anticipating rate hikes to peak in 2023, and a potential pause or cut in the current Federal Reserve rate hiking cycle could be a catalyst for APAC REITs.
- Also positive for APAC REITS is that valuations are now more attractive. The sector is currently valued below average at 0.73 times price-to-book (P/B) ratio. A reversion to the mean would give rise to a potential upside of about 16 percent.
- Furthermore, APAC REITs continue to be a good source of regular income. The current average forward dividend yield of 4.4 percent is high enough to attract income-seeking investors. We expect the 2-year distribution per unit (DPU) to grow at a healthy 2.3 percent CAGR.
Potential for Singapore REITS to shine
The Singapore REITs (S-REITs) sub-sector is showing both upside potential and good resilience. A potential pivot in interest rates this year could relieve the pressures of high financing costs on S-REITs, resulting in greater earnings visibility and dividend distributions. The resumption of Chinese travel is another potential boost for Singapore’s retail and hospitality REITs.
In addition, while Singapore faces a more subdued macroeconomic environment heading into 2023, property valuations and S-REITs’ earnings growth has the ability to cushion any downside risks.
A balance of growth and defensiveness
When choosing which sub-sectors to invest in, UOBAM currently favours a barbell approach of balancing between growth and defensiveness.
Industrial REITs provide a good balance of defensiveness and organic growth potential as tailwinds from secular growth in e-commerce remain intact. We prefer industrial REITs at reasonable valuations.
Office REITs allows for investors to leverage the flight-to-quality trend. We are upbeat on central business district (CBD) Grade-A office properties.
Retail REITs are set to see a firmer recovery this year. Prime retail will be supported by the return of Chinese tourists and limited supply of new retail spaces, while suburban malls remain resilient.
Hospitality REITs are expected to enjoy a robust earnings recovery as the rebound in global travel gains further momentum. The expansion into new business models such as student accommodation is another positive.
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