REITS - RHB Invest 2016-03-16: Double Happiness With Retail & Hospitality

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ASCENDAS REAL ESTATE INV TRUST A17U.SI  CAPITALAND MALL TRUST C38U.SI  FRASERS CENTREPOINT TRUST J69U.SI  OUE HOSPITALITY TRUST SK7.SI 

REITS - Double Happiness With Retail & Hospitality 

• We upgrade the SREITs sector to OVERWEIGHT (from underweight) as we see value emerging. 
• We think that this sector is extremely attractive, as it has the widest yield spreads amongst its peers. 
• We like the retail subsector for its unbeatable resilience and expect rental reversions to persist this year. 
• We also like the hospitality subsector as there is an increasing number of new conferences and events in 2016. 
• Our Top Picks are Ascendas REIT, CMT, FCT and OUEHT. 

SREITs have the widest yields spread, with retail and hospitality preferred. 

• We regard the SREIT sector as the most compelling regionally, as it displays the widest yield spread (4.60%) among its regional peers (average: 2.44%). 
• We also expect yield spreads to expand further as the market continues to expect the US Federal (Fed) Funds Rate (FFR) hike to be delayed. 
• Within the sector, we like the most the retail and hospitality subsectors, mainly on their unbeatable earnings resilience and a recovery in the tourism sector respectively. 
• For retail exposure, our Top Picks are CapitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT). 
• Meanwhile, OUE Hospitality Trust (OUEHT) is the best proxy for domestic hospitality exposure. 

We expect CMT and FCT to register positive rental reversions as we see healthy tenants’ sales trends. 

• We are expecting positive rental reversion of 5-7% for the retail REITs this year while keeping up its reputation for resilience. 
• We like both CMT and FCT as they have displayed positive growth in tenants’ sales last year, 5.3% and 2.3% YoY respectively. This suggests that both REITs are in a stronger position to command a higher rate. 
• Additionally, we are not overly concerned about the impact of e-commerce businesses on CMT and FCT, as the REIT managers have been transforming the malls into lifestyle destinations. 

OUEHT is the biggest hospitality sector beneficiary in 2016. 

• We expect revenue/available room (RevPAR) to grow by 1-3% this year, as we note the increase in new conferences in the pipeline and the return of biennial events. 
• We also find value emerging within the hospitality space, as the subsector is currently trading at a 20% discount to its book, with a yield spread of 5.67%. 
• We think that OUEHT is the biggest beneficiary, as its high exposure to the upscale hotels segment should allow it to profit from more corporate business this year. 

Avoid office and industrial. 

• We recommend that investors avoid exposure to office and industrial REITs, as we continue to see unfavourable supply-demand dynamics within these two subsectors. However, we perceive business parks space as the crown jewel, as we expect demand to remain strong due to low cost advantages. 
• We recommend Ascendas REIT as the best proxy to business park space, as its portfolio has one of the largest exposure to this subsector. 

Key risk: 

• An unexpected increased in U.S. Fed Fund rate and an expansion in cap rates may see capital devaluation within the sector.

Ivan Looi RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-16

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