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Stick With S-REITs In Growth Sectors Amid Inflation And High Oil Prices: DBS (The Edge Singapore)

March 21, 2022 – Amid persistently high inflation rates coupled with rising oil prices, businesses are now looking at higher utilities and petrol costs, as well as labour costs.

Landlords, too, will have to face higher utility and maintenance costs when their contracts are rolled over to the 2HFY2022 and FY2023.With most Singapore REITs (S-REITs) as landlords, operational costs in maintaining the common areas, will have to be borne as well.

While some of these costs can be defrayed through service charges, landlords will still have to bear some of the burden going forward, note DBS Group Research analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong.

“In the most recent meetings, we see more questions surrounding the impact of higher utilities and maintenance contracts on net operating income and distributions,” they write in their report dated March 18.“

“In our analysis and engagement with various companies, the spike in utilities and maintenance will indeed be an overhang but overall impact is varied and manageable,” they add. “We believe that the ability to continue growing revenues strongly at [around] 20% in FY2022 will be a key mitigator to the rise in operational costs.”

Should utilities rise 100% and maintenance costs go up by 10%, however, the analysts have estimated that net property income (NPI) margins may be lowered by 0.8 percentage points to -3.7%, with a larger decline seen industrial-focused S-REITs due to their bigger exposure to both maintenance and utilities.

The lower NPIs translate to a possible drop in distributions per unit (DPUs) of around 1.8% to 6.7%, with the warehouse sector seeing the lowest declines of c.1.8%.

Read more here..

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