Singapore REITs - OCBC Investment 2016-03-11: Sector Outlook



  • Retail REITs: Preference remains for suburban-focused retail REITs. 
  • Office REITs: Proactive approach by REIT managers. 
  • Industrial REITs: Macro and supply woes. 
  • Hospitality REITs: Outlook still largely cautious.

Retail REITs: Preference remains for suburban-focused retail REITs 

  • Looking ahead, the outlook for retail REITs remains challenging, given structural headwinds such as a shortage of manpower and continued competition from e-commerce platforms. 
  • Singapore’s retail sales grew 2.9% YoY for the month of Dec last year, but this was largely driven by motor vehicles. Excluding this, retail sales would have fallen 3.6% YoY. 
  • According to CBRE, the total net absorption for the retail sector came in at -0.15m sq ft in 2015, which was the first negative figure since 2011. 
  • Data points from URA also showed that rentals of the private sector retail space in the Central Region dipped 1.3% QoQ in 4Q15, representing the fourth consecutive quarter of decline. 
  • For 2015, rentals of retail space came in lower by 4.1%. Given this backdrop, it was unsurprising that retail REITs largely registered a moderation in their rental reversions in 4QCY15, and we expect this trend to continue in 2016. 
  • We thus prefer the more defensive suburban-focused retail REITs, such as Frasers Centrepoint Trust [BUY; FV: S$2.25]

Office REITs: Proactive approach by REIT managers 

  • The impending increase in Singapore’s office space supply in 2H16 and 1H17 has exerted downward pressure on core CBD rents since 2Q15. 
  • In 4Q15, average Grade A office rentals fell 4.6% QoQ to S$10.40 psf/month, the third consecutive QoQ decline seen. Occupancy rates also slipped from 95.8% in 3Q15 to 94.8% in 4Q15. 
  • The outlook remains challenging, in our view, underpinned by more cautious corporate sentiment, especially within the financial and commodities sectors. However, this would be partly mitigated by stronger demand from tenants in the telecommunications, multimedia and technology (TMT) sectors. 
  • We project Grade A CBD office rents to correct ~10% in 2016. 
  • Notwithstanding this soft outlook, we note that most office REIT managers have been proactively engaging their tenants and negotiating on early renewals. For example, Keppel REIT highlighted that it is in advanced negotiation with almost all tenants with leases expiring in 2016, and is likely to achieve a high retention rate. CapitaLand Commercial Trust (CCT) has 10% of its total office NLA expiring in 2016, as at 31 Dec 2015, after a forward renewal of 5% of its office NLA. This represents an improvement, as CCT had 14% its total office NLA expiring in 2016 at the end of 3Q15. Similarly, Suntec REIT also brought its office leases expiring in 2016 down from 21.4% of its total office NLA (end 3Q15) to 14.9% of NLA (end 4Q15). 
  • Within the office REITs space, we have a BUY on Frasers Commercial Trust (FV: S$1.42), as we believe vacancy and rental rates of the Grade B office segment has historically been less volatile than the Grade A office segment. 

Industrial REITs: Macro and supply woes 

  • Based on JTC’s 4Q15 market report, the prices, rentals and occupancy of Singapore’s industrial space suffered a dip of 1.5%, 1.1% and 0.2 ppt on a QoQ basis, respectively. This is a reflection of the subdued macroeconomic landscape. 
  • Uncertainty over global economic growth would continue to paint a bleak picture for the near-term demand of industrial space, in our view. The situation is exacerbated by oversupply concerns in the industry, as an estimated 2.9m sqm of industrial space is expected to come on-stream this year. 
  • A further 1.6m sqm of supply is estimated to be added in 2017. These figures are higher than the average annual demand of ~1.2m sqm and supply of ~1.7m sqm over the past three years. 
  • Given these factors, industrial REIT managers have sounded cautious in their outlook statements. Besides the unfavourable demand and supply dynamics, there are also cost pressures as expenses related to outsourced serviced contracts are expected to increase. 
  • Our preferred pick within the industrial sub-sector is Mapletree Logistics Trust [BUY; S$1.04], given its healthy valuations. The stock offers a FY17F distribution yield of 8.0%, which is more than 1.5 standard deviations above its 5-year forward mean of 6.9%. 

Hospitality REITs: Outlook still largely cautious 

  • Recent statistics released from Singapore Tourism Board (STB) revealed that overall international visitor arrivals to Singapore grew by a marginal 0.9% to 15.2m in 2015. This comes in close to the mid-end of STB’s forecast range of 15.1-15.5m visitors for the full-year. 
  • A silver lining came from the fact that monthly visitor arrivals increased for eight consecutive months on a YoY basis from May to Dec. However, tourism receipts dipped 6.8% to S$22.0b, while overall RevPAR fell 5.4% YoY to S$208.80 given a 0.5 ppt drop in occupancy to 85% and a 4.8% decline in average room rate to S$245.70. 
  • Looking ahead, hospitality players remain largely cautious on the nearterm prospects. This can be attributed to an uncertain macroeconomic environment and large incoming supply of hotel rooms. According to market watcher Horwath HTL, an additional 3,930 hotel rooms is expected to be added to the Singapore market this year, representing an increase of 6.4% from 2015. 
  • Meanwhile, STB has projected international visitor arrivals to come in at 15.2-15.7m for 2016, implying growth of 0-3%. Tourism receipts are forecasted to grow 0-2% to S$22-22.4b. 
  • Our preferred pick within the hospitality sector is Ascott Residence Trust [BUY; FV: S$1.28], given its more resilient extended-stay business model. We also like CDL Hospitality Trusts [BUY; FV: S$1.38] for its cheap valuations.

Wong Teck Ching Andy OCBC Investment | http://www.ocbcresearch.com/ 2016-03-11
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.28 Same 1.28
BUY Maintain BUY 1.38 Same 1.38
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