OCBC Investment 2015-08-26: Singapore REITs - Muted outlook.

Singapore REITs

Singapore REITs: Muted outlook 

 Hospitality REITs missed expectations again 
 Expect more volatility ahead 
 Outlook largely muted 

2QCY15 earnings season roundup 

  • Following the conclusion of the 2QCY15 results season, we note that out of the 23 S-REITs under our coverage, all four hospitality REITs (CDL Hospitality Trusts, Ascott Residence Trust, Far East Hospitality Trust and OUE Hospitality Trust) reported earnings which fell short of our expectations. 
  • The other REITs delivered results which were in-line, with none beating our expectations. Some of the better performers were Suntec REIT (DPU +10.3% YoY due to full quarter contribution from Suntec City mall phase 2 AEI), and overseas retail-focused REITs such as Fortune REIT (DPU +11.9% YoY) and Mapletree Greater China Commercial Trust (DPU +8.7% YoY). 

Headwinds likely to persist 

  • Despite the positive boost from the SEA Games in June, it was not sufficient to offset continued softness in tourist arrivals and weak corporate sentiment. This had a flow-through effect on hotel RevPARs/RevPAUs and retail sales in the Orchard Road region. Optimism over the recovery prospects of the hospitality sub-sector in 2H15 appears to have faded, as we believe corporates would continue to tighten their pursestrings amid growing concerns over the global economy. 
  • On the office front, the upward trajectory of average Grade A office rents may have reached an inflection point, as URA data showed that the office rental index for the Central Region fell 2.6% QoQ in 2Q15. This was the first quarterly decline following eight consecutive quarters of growth. 

Moderating trend in rental reversions 

  • We also note the trend of continued moderation in rental reversions across the various sub-sectors (with some assets even recording negative rental reversions), and REIT Managers are largely cautious on the outlook, given headwinds emanating from the uncertain macroeconomic landscape and higher expected supply coming on-stream to the market. 

Maintain NEUTRAL on S-REITs sector 

  • We opt to maintain NEUTRAL on the S-REITs sector for now, despite the FTSE ST REIT Index plunging to a 3-year low following our last paper urging caution on the sector (please refer to our report “Urge Caution on S-REITs; Reallocate to High-end and Growth Themes” on 21 Jul 2015). 
  • The market sentiment remains weak, whilst the operating environment continues to be fraught with challenges, coupled with uncertainties over the Fed lift-off which may result in greater volatility ahead. 
  • Nevertheless, we do see some opportunities to bargain hunt for selective stocks, and recommend Frasers Centrepoint Trust [BUY; FV: S$2.24], Keppel DC REIT [BUY; FV: S$1.24], Frasers Commercial Trust [BUY; FV: S$1.65] and Starhill Global REIT [BUY; FV: S$0.93] as our top sector picks. 

Wong Teck Ching Andy | http://www.ocbcresearch.com/ OCBC Investment Research 2015-08-26
BUY Maintain BUY 2.24 Same 2.24
BUY Maintain BUY 1.24 Same 1.24
BUY Maintain BUY 1.65 Same 1.65
BUY Maintain BUY 0.93 Same 0.93