Tuesday 19 Mar 2024
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SINGAPORE (July 8): With the twists and turns in the UK following the Brexit vote, investors are now expecting the low interest rate environment to continue, according to UOB Kay Hian’s Vikrant Pandey and Derek Chang.

The obvious beneficiaries of that perception are the Singapore-based Real Estate Investment Trusts (REITs) and the overall property sector, so Pandey and Chang have maintained their “overweight” recommendation on the sector. “The increase in the required return for UK or Europe exposure is more than compensated for by the built-in buffer and the drop in the risk-free rate,” they explained in a note on Friday.

Still, the duo notes that certain property companies have significant exposure to the Europe and UK markets. Ho Bee Land has 30% of its gross asset value (GAV) in the UK and City Developments (CDL) has 12% GAV in Europe and another 11% in the UK. For Ascott Residence Trust (ART), 28% of its GAV is in Europe and 11% is in the UK. Frasers Hospitality Trust (FHT) sees 24% of its GAV in Europe and another 19% in the UK. CDL Hospitality Trusts (CDREIT) has the least exposure, with 5% of its GAV is in UK.

They also added noted that currency translation effects would be minimal for CDREIT and CDL who have a natural currency hedge in place. FHT has also hedged 70% to 80% of its distributions from UK, while ART has about 30% of full year foreign income hedged.
Ho Bee Land would be the most vulnerable to currency fluctuations, as a 10% depreciation of the GBP against the SGD would reduce group earnings by 2.9%, according to UOB Kay Hian’s estimates.

According to Pandey and Chang though, the biggest risk would come from the office segment, where the potential loss of access to the EU’s single market would “jeopardise London’s standing as the financial hub of Europe”.

Meanwhile, the hospitality and development segments may benefit from the potential pick-up in leisure travel and overseas buyers from China and the Middle East.

As such, among the counters that UOB Kay Hian covers with exposure to the UK and Europe markets, it has a buy recommendation for CDREIT and a target price of $1.55.

UOB Kay Hian’s other top stock picks for the property sector include CapitaLand, CDL, Ascendas REIT (AREIT), and Keppel REIT (KREIT).

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