Property & REITs - UOB Kay Hian 2017-06-13: Postcard From North America

Property & REITs - Regional - UOB Kay Hian 2017-06-13: Postcard From North America Singapore Property Sector Singapore REITs CAPITALAND LIMITED C31.SI WING TAI HLDGS LTD W05.SI CAPITALAND COMMERCIAL TRUST C61U.SI ASCENDAS REAL ESTATE INV TRUST A17U.SI FRASERS HOSPITALITY TRUST ACV.SI

Property & REITs - Regional - Postcard From North America

  • Our marketing trips in North America saw sustained investor interest in property and REITs as clients position for a slower-than-anticipated interest rate hike. 
  • For Singapore property and REITs, the supply-led improvement in fundamentals for business parks, hotel and residential appeals to clients. 
  • For Hong Kong property, clients are looking for potential beneficiaries of agricultural landbank conversions, while waiting for greater clarity on policy direction.



WHAT’S NEW

  • Our recent marketing trips in the US and Canada saw sustained investor interest in SREITs and the housing market in Singapore. 
  • Our discussions with fund managers and analysts centred on topics regarding the impending interest rate hikes, policy direction in residential and demand-supply dynamics for the sub segments.


ACTION 

  • Clients are positioning for a slower-than-anticipated interest rate hike that should bode well for the property and REITs sectors.
  • OVERWEIGHT on Singapore property & S-REITs. The supply-led improvement in fundamentals for business parks, hotel and residential appeals to clients. We recommend a deep value and diversification strategy with AREIT, CCT, FLT, FHT, CapitaLand and Wing Tai as our top picks.
  • MARKET WEIGHT on Hong Kong property. Clients are looking for potential beneficiaries of agricultural landbank conversions, while waiting for greater clarity on policy direction. Prefer deep-value and diversified developers with SHK and NWD as our key BUYs and Wharf as our key SELL.


ESSENTIALS


Clients positioning for a slower-than-anticipated interest rate hike. 

  • There was general consensus among clients that the Fed could dither on a hike in interest rates, citing weaker-than-anticipated pick-up in economic growth while observing a flattening of the yield curve especially at the 10Y mark. This should bode well for the property sector and REITs sector
  • For Singapore REITs in particular, the attractive yield spread and precedence of transition from being viewed as yield vehicles to growth vehicles should the rate hike be faster than anticipated, saw good interest from clients.


Singapore Property & REITs: OVERWEIGHT 


Silver lining in supply. 


Interest in developers to position for fundamental shift in 2018 on supply-side recovery. 

  • There is good interest in Singapore developers due to the expectations of vacancy to peak in 2017 before fundamentals begin improving in 2018 to 2020. This will be propelled by tapering private residential supply, as even we forecast muted residential demand of about 8,200 units annually from 2015 to 2020, by incorporating conservative population growth estimates at a CAGR of 1.2%. 
  • We expect the impact of multiple rounds of cooling measures, together with higher supply, to lead to a healthy 15% moderation in property prices from 2013’s peak, beyond which we expect prices to trend in line with GDP growth. 
  • CapitaLand and Wing Tai are our preferred picks among developers.

Industrial: Business park stands out on supply-side. 

  • We opine that the business and hi-tech segments could benefit from spill-over office demand. This is especially due to the lack of pre-committed business park and hi-tech space supply from 2017, according to industry consultant CBRE. However, industrial REITs with exposure to domestic warehouse/factory space will likely continue to be susceptible to supply-side rental pressure. 
  • AREIT is our preferred pick in the industrial space.

Turnaround in hospitality space in sight

  • Turnaround in hospitality space in sight as 2018 supply of hotel rooms is expected to slow to a trickle (around 69 rooms or +0.3% yoy). As hotel room supply has historically exhibited a tendency of being deferred, 3Q17 could be opportune for investors to pick up hospitality REITs should signs of back-end loaded hotel room supply fail to materialise. 
  • Frasers Hospitality Trust (FHT) is our preferred pick in the hospitality space.


Hong Kong Property: MARKET WEIGHT 

  • Expectations of persistent unfulfilled demand and short supply saw clients looking for potential beneficiaries of agricultural landbank conversions, while waiting for greater clarity on policy direction. We believe that the government’s initial focus will be on affordable homes rather than private housing which may see farmland conversion policies in New Territories being fast tracked to increase land supply (within our coverage, NWD, SHKP and CKP have high exposure to farmland).
  • Fresh perspective on taking policy cues from key international gateway cities generated good interest. While most regimes have faced similar difficulties in getting property prices under control, Taipei, Singapore and China have had some successes.
  • Seoul, Sydney and Vancouver are still in the early stages of the policy tightening cycle relative to Hong Kong. 
  • Singapore’s combination of TDSR, elevated supply and muted foreign population growth is preferred over China’s HPR and Taiwan’s capital gains tax due to Hong Kong’s image as an open market. Clients took note of the long-term historical discounts to NAV in arriving at our target prices vs the downcycle discounts used by the street.

Increasing caution in commercial space. 

  • Aggressive bidding in the commercial space and rising supply outside of central Hong Kong saw increased cautious stance from clients. Some prefer exposure to non-discretionary retail with Link REIT as a preferred exposure. 
  • Rental trends continued to diverge in 1Q17, up 2.4% qoq in Central and 5.9% qoq in Wong Chuk Hang, but down 0.2% qoq in New Territories and up marginally by 0.2% qoq in Kowloon East. We expect the divergence to continue in 2017 as office supply will mainly be concentrated in Kowloon East for the next four years, while the CBD in Hong Kong Island still faces a severe undersupply. 
  • We expect flat rentals overall with upward pressure in the CBD and downward pressure outside of Central.







Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | Lauren Jiang UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.300 Same 4.300
BUY Maintain BUY 2.610 Same 2.610
BUY Maintain BUY 2.97 Same 2.97
BUY Maintain BUY 0.800 Same 0.800



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