Property & REITs - UOB Kay Hian 2016-03-11: Malaysia Marketing Trip Takeaways

Property & REITs - UOB Kay Hian 2016-03-11: Malaysia Marketing Trip Takeaways Singapore Property WING TAI HLDGS LTD W05.SI  CITY DEVELOPMENTS LIMITED C09.SI  ASCOTT RESIDENCE TRUST A68U.SI  MAPLETREE LOGISTICS TRUST M44U.SI  CAPITALAND COMMERCIAL TRUST C61U.SI 

Singapore Property & REITs ‒ Malaysia Marketing Trip Takeaways 

  • Our marketing trip in Malaysia saw sustained interest in S-REITs as clients position for a slower-than-anticipated interest rate hike. 
  • Our discussions centred upon interest rate impact, potential unwinding of property cooling measures, the sharing economy’s impact on the hospitality sector and supply concerns in the commercial, retail and industrial space. 
  • We remain OVERWEIGHT with KREIT, CCT, ART, MLT, City Developments and Wing Tai as our top picks. 



WHAT’S NEW 

  • The recent conclusion of our marketing trip in Malaysia saw sustained interest in S-REITs and the housing market in Singapore. 
  • Our discussions with over 30 fund managers and analysts centred upon topics regarding the impending interest rate hikes, potential unwinding of property cooling measures, the sharing economy’s impact on the hospitality sector and supply concerns in the commercial, retail and industrial space. 


ACTION 


• Maintain OVERWEIGHT, prefer deep value and diversification strategy. 

  • Clients are positioning for a slower-than-anticipated interest rate hike that should bode well for the property and REITs sector. 
  • We recommend a deep value and diversification strategy with KREIT, CCT, ART, MLT, City Developments and Wing Tai as our top picks. 


ESSENTIALS 


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

  • Potential interest rate hikes were a key point of contention from clients. We surmise that existential quantitative easing in major economies like the EU, China and Japan (negative interest rates), and volatility in financial markets could result in slower-than-anticipated uplift in interest rates, benefitting S-REITs. 
  • There was a general consensus among clients that the Fed could dither on a hike in interest rates, and we noted vestigial optimism towards the REIT space, as concerns remain (as detailed below). 

• S-REITs are well prepared for a rate hike. 

  • On a similar note, we reckon that steps taken by REIT managers ie longer-tenure debt (3.4 years vs 1.7 years in 4Q08) and fixing 60-100% of interest costs should delay the impact of potentially rising interest rates over the next 12-18 months. 

• Hospitality: Impact of sharing economy… 

  • Questions were posed on the potential impact Airbnb could unleash upon the local hoteliers. We note that current guidelines in Singapore prohibit HDB homeowners from subletting rooms for short-term stays, while private residences are meant for a term period of six months or more. 
  • While hospitality REITs acknowledge the potential ascendancy of Airbnb, these home-sharing sites cater primarily towards leisure trips, while corporate business typically makes up 50-60% of their clientele, lowering their susceptibility to the sharing economy. 

• …amid sobering tourist arrivals. 

  • We also faced queries on the somewhat lacklustre tourist arrivals figure in Singapore. We note that despite declining Indonesian and Malaysian tourist arrivals (9.7% and 5.0% yoy respectively in 2015), we were heartened by the resurgence in Chinese visitors (up 22.3% yoy in 2015). 
  • 2015 closed with an uptick of 1% in overall tourist arrivals. We are optimistic on a better 2016, underpinned by healthy Chinese numbers, as well as events like the biennial Singapore Airshow on the calendar, which should mitigate the expected 6.4% expansion in hotel room supply this year. 

• Office: Sky-scraping supply glut in 2016. 

  • Concerns revolved around the overall 4.2m sf of commercial space slated for 2H16 with bulk from Marina One (1.9m sf), and its knock-on effect on our top pick KREIT. However, with 2018 seeing a relative dearth of CBD space at a meagre 0.65m sf (Frasers Tower) the constrained supply then would bode well for the sector. 
  • In addition, we opine that with its favourable lease expiry profile (13.6% and 11.0% by NLA due 2016 and 2017 respectively) and healthy rental headroom (over 20% buffer between average passing and spot rents), KREIT is well placed to weather the brunt of the glut. 
  • Separately, we note that while office REIT managers have so far reported resilient asset valuations with modest gains booked, we continue to be on the lookout for signs of revaluation losses, which would have an adverse impact on book values and consequentially aggregate leverage. 

• Retail: Tenants spoilt for choice in upcoming suburban malls… 

  • There were also supply-side concerns voiced regarding the domestic retail scene, with upcoming supply of 4.2m sf of space set to kick in from 2016-18. 
  • Suburban mall operators like CapitaLandMall Trust and Frasers Centrepoint Trust could likely see reversionary pressure, as the bulk of the incoming supply is largely confined to suburban catchment areas. 
  • We note that both REIT managers have rolled out a slew of refurbishment exercises, such as the impending closure of Funan Digitalife by CMT and FCT’s overhaul of NorthPoint Shopping Centre. 

• …as shoppers revel online. 

  • Online platforms have remained a thorn in the sides of traditional retailers. Our channel checks indicate mall operators continue to: 
    1. reconfigure their tenant mix to provide experiential offerings or increase F&B outlets, and 
    2. unveil their online platforms. 
  • We note that the fast fashion arena looks to be particularly under threat, in the face of not only the pull of online retailing, but the shortfall in manpower as well. 

• Industrial: Single-user asset conversion. 

  • Clients pointed out their concerns regarding the conversion of MLT’s single-user asset (SUA) to multi-tenanted buildings. Conversions would typically impact NPI margins due to the resulting downtime, which means that the REIT manager’s executions skills in mitigating this are crucial. We also expect pressure on margins to be cushioned by full contributions from recent acquisitions and divestment gains from non-performing assets. 
  • Additionally, management intends to continue pursuing growth beyond domestic shores and eventually increase its overseas exposure to 75% from the current 64%, targeting markets like Japan and South Korea. We view the geographic diversification strategy favourably, given supply headwinds in the industrial space, with the exception of business parks, where no known supply will exists post 2016, according to CBRE reports. 

• Developers: Policy easing on the cards? 

  • We faced queries on residential take-up given the sluggish market. We note that fast-moving projects like High Park Residences, North Park Residences and Botanique at Bartley are typically priced to sell, are well located, or have appealing attributes. 
  • We expect the property price index to fall 12-15% from 2013’s peak, with individual projects likely to register 15-20% drops from the peak, before the government enacts measures to arrest the plunge and prevent value destruction on the 80% LTV taken by many homebuyers. 
  • The Singapore Budget 2016 that will be announced on 24 March is unlikely to unveil any positive surprises though, given the Government’s current stance. 
  • With the correction of the price index now at 8.4% from 2013’s peak after nine consecutive quarters of decline, we opine that unwinding of severe policy cooling measures like the Additional Buyers Stamp Duty could occur in 4Q16. This would bridge the gap in valuations between undervalued developers (trading at discounts of 40-60% discounts to RNAV), and the physical property market.


TOP PICKS 



PEER COMPARISON 





Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-30
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.50 Same 2.50
BUY Maintain BUY 10.86 Same 10.86
BUY Maintain BUY 1.39 Same 1.39
BUY Maintain BUY 1.28 Same 1.28
BUY Maintain BUY 1.79 Same 1.79


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