2 factors blamed for "dramatic" correction in Singapore REITs

Interest rate jitters is one.

According to OCBC Research, the past two weeks has seen a huge correction in the SREITs sector which the research firm attributed to a possibly earlier-than-expected Federal Reserve curtailment of bond purchases, as well as profit-taking after last year's bull run.

Here's more from OCBC:

Interest rate fears hitting S-REITs sector. We see two key factors driving the dramatic correction in the S-REITs sector over the last two weeks. First, increased expectations that the Federal Reserve could taper its bond purchases as early as 2H13; and secondly, the market going into opportunistic profittaking on the back of a strong performance over 2012-13. At this juncture, however, we see the selling to be overdone – the S-REITs sector has nearly relinquished all of its YTD gains the FSTREI was up 13.5% YTD on 15 May 2013 is now up only 1.6% YTD as at 3 June 2013 – and would now selectively bargain hunt for REITs with firm fundamentals and good potential for DPU growth.

S-REIT valuations undemanding. In our view, the odds of the Fed tapering bond purchases in 2H13 are roughly 50-50 and we see fundamental valuations for the SREIT sector to be undemanding currently. The S-REIT sector is trading at a market-cap weighted spread of 370bp against the 10Y government bonds, which is still attractive versus the 4-year average of 430bp and also versus other major REIT markets, such as Hong Kong (280bp), Japan (310bp) and Australia (200bp).

S-REITs benefiting from strong fundamentals. We see S-REITs delivering firm financial performances in 2013 from asset enhancement initiatives/development projects, yield-accretive acquisitions and active leasing efforts. For our coverage, we expect the S-REITs to post 6.6% growth in aggregate DPU for the current fiscal year, before experiencing another 8.6% growth in the next year.

Selectively bargain hunt. Given current valuations, we maintain our OVERWEIGHT rating on the S-REIT sector and advocate for bargain hunting for S-REIT with good growth potential, strong financial position and compelling valuations (relatively lower P/B and decent DPU yields). Starhill Global REIT [BUY, S$1.05 FV] is our top pick in the sector due to its growth potential, strong fundamentals and compelling valuations. We also like CapitaCommercial Trust [BUY, S$1.80 FV] and Fortune REIT [BUY, HK$8.64 FV] for the quality of their portfolio assets, positive rental reversion profiles and low gearing.

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