3 reasons why SREIT stocks are poised to catch up

Interest in sector should return soon.

The lagging Singapore REITs should catch up and even outperform the STI in the next three years, according to Barclays.

This should make Singapore REITs more attractive to institutional investors, in particular big caps like CT, CCT, AREIT and KREIT.

Here's more from Barclays:

We believe SREITs are poised to catch up based on 1) the historical high correlation with US REITs and SREITs' recent 19% underperformance since 2013; 2) SREITs' 90-300bps yield spreads above its historical norm and those global peers; and 3) the high correlation historically to yield curve steepness, suggesting potential outperformance vs. the STI in the next three years. Thus, we expect institutional interest to return to the sector and recommend that investors focus on the big cap SREITs, like CT, CCT, AREIT and KREIT.

Strong correlation and SREITs have underperformed US REITs by 19% since 2013: Historically, the dollar-adjusted SREIT index has had a correlation of 0.93x to the NAREIT index; however, the gap between the two has widened from 2 January 2014 with SREITs having underperformed US REITs by 19% since 2013 even as both US and SG 10-year bond yields have stabilized. We believe this was possibly due to liquidity issues with 1) significant fund outflows from emerging markets in Asia and 2) new SREIT listings. We see scope for the SREITs to catch up as they did in 2005-2006 when interest rates were on the rise, which also saw US REITs leading SREITs by about two months.

Yield spreads of 90-300bps above historical norms and those of global peers: Based on our regional trading comparables, we believe SREITs offer the best forward yield spreads of 4.8% vs. their global REIT peers in Japan, the US and Hong Kong at 3.3%, 1.8% and 2.6%, respectively. We believe the 90bp spread above the historical norm for the past 12 years overly compensates for the possibility of further rate increases. Given our expectation that funding costs for SREITs will remain low until end-2015, we believe the current yield spreads present an exceptional risk-reward and carry.

The US experience – outperformance after underperformance: In the US, in each of the six periods in the past 20 years when REITs have corrected significantly driven primarily by rate increases, NAREITs underperformed the equity market's returns in the short term but thereafter delivered subsequent periods of strong absolute returns, generally outperforming the broader equity market as proxied by the S&P 500.

The yield curve could have played a role similar to US REITs' trend from 2002-13: SREITs have historically outperformed the general Singapore market index, the STI, on a 3-year return basis when the yield curve has been steep. Our Barclays Research rates team expects the yield curve to steepen in the next year, which would imply a sustained outperformance by REITs generally given historical trends.

Go for the big caps: Given the deep relative value, we expect institutional interest to return to the SREITs sector, which would favour the biggest and most liquid names: CapitaMall Trust, CapitaCommercial Trust, Ascendas REIT and Keppel REIT, all rated OW and which we estimate offer total returns of 21-40%, including a weighted average FY15E dividend yield of 6.8%. By segment, we favour Office, Retail and Industrial in that order.