Are S-REITs worth investing amidst refinancing risks?

China-focused real estate will be the most affected.

Some S-Reits will be facing macroeconomic risks such as refinancing their loans, especially those with a portfolio focusing on China, RHB said.

In a brokerage report, the analyst said some China-focused REITs such as EC World REIT and Dasin REIT may be the most affected because banks reduced their loan exposure to China post zero COVID-19 strategy.

“These S-REITs are currently in various stages of exploring options for loan refinancing, along with plans of asset sales. The failure to successfully refinance their loans would result in a potential default and possession of the assets by lenders,” said RHB.

Flattish DPU

RHB also expects flattish distribution per unit (DPU) for REITs in the fiscal year of 2023 due to faster interest rate hikes. The analyst lowered its DPU prediction for S-REITs by 3% to 15%.

“The earnings downgrade came on the back of sharper-than-expected rate hikes impacting interest costs and a weakening economic outlook moderating operational growth,” said RHB.

Looking ahead, DPU growth will be primarily backed by the industrial, hospitality, and selective office REITs.

Volatile market

With the S-REITs facing volatility this year, RHB lowered its recommendation to neutral from overweight.

It suggested that investors should be selective and defensive whilst having a preference for the industrial sector and REITs with strong balance sheets and sponsor support.

Overseas S-REITs are trading at distress valuations and could see a sharp bounce back once the dust settles.

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