Brokers’ take

Compiled by Lynette Tan

REITS

OVERWEIGHT (MAINTAINED)

RHB Research Institute, Jan 8

Growing uncertainty over global economic growth and persisting trade tensions have resulted in investors preferring safe haven-yield instruments, which is supportive for real estate investment trusts (Reits).

In addition, US Fed chair Jerome Powell's recent dovish tone is positive for Reits, as one of investors' key concerns was a sharp spike in interest rates making Reits relatively unattractive.

Thus, investors' continued appetite for yields and safe haven instruments is clearly visible, with 10-year US and Singapore bond yields currently at 2.66 per cent and 2.13 per cent respectively, down nearly 60 basis points from their 2018 peak.

Except for the retail segment, which is expected to see about 3 per cent newly completed space added to inventory, supply for other segments will remain benign (below 2 per cent).

As the huge supply growth was a major dampener for Reits' distribution per unit (DPU) growth over the last few years, the slowdown in supply combined with stable demand should help landlords regain pricing power this year.

Inorganic growth is also expected from the acquisitions that Reits have made in recent years.

While a broad-based sector outperformance is not expected, we expect S-Reits with stock-specific positives to continue to outperform this year.

We still prefer industrial and hospitality Reits on their positive outlook and valuations.

While office rental rates have been on a steady uptrend, the positive effects are likely to be seen in DPU only late this year.

Thus, we believe office Reits should be more of a H2 2019 play. While retail Reits have outperformed last year, their outlook remains challenging amid relatively high incoming supply.

CAPITALAND

ADD (MAINTAINED)

TARGET PRICE: $3.55

JAN 9 CLOSE: $3.19

CGS-CIMB, Jan 7

CapitaLand has acquired about 70 per cent of Pufa Tower in Shanghai, China, for 2.75 billion yuan (S$546 million) via a 50:50 joint venture with an unrelated third party.

This asset is operational and will immediately contribute to the group's recurring income.

The property has been identified as a prime asset to be seeded into the value-add fund that CapitaLand is setting up to invest in key gateway cities in Asia.

The fund size is expected to be up to US$1 billion (S$1.36 billion) assets under management.

The acquisition represents CapitaLand's first office property in Shanghai's core Lujiazui central business district in Pudong New Area. Office rents in Lujiazui are the highest in the city and are expected to rise in view of the sharp decline in office supply from this year.

With its last major renovation in 2002, CapitaLand sees significant potential in enhancing the asset's value by upgrading specifications, tenant mix and improving operational efficiencies; this could improve net yield of over 4 per cent.

We maintain our target price of $3.55, pegged to a 35 per cent discount to revalued net asset value (RNAV).

Contributions from the acquisitions have not been factored into our forecasts, and RNAV is unchanged for now.

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