Singapore REITs - OCBC Investment 2016-05-19: In-line Quarter, But Challenges Remain

Singapore REITs - OCBC Investment 2016-05-19: In-line Quarter, But Challenges Remain ASCENDAS REAL ESTATE INV TRUST A17U.SI  FRASERS CENTREPOINT TRUST J69U.SI  KEPPEL DC REIT AJBU.SI 


  • Softness in industrial and hospitality sectors
  • Outlook largely cautious
  • FCT, KDCREIT and AREIT our top picks

Tepid 1QCY16 performance from industrial and hospitality sub- sectors

  • During the recently concluded 1QCY16 earnings season, all 22 S-REITs under our coverage posted results which met our expectations. However, reported DPU was largely subdued, a clear reflection of the challenging operating environment. 
  • Overall DPU growth came in at -0.9% on a YoY basis, versus positive YoY growth of 1.9% recorded during the 4QCY15 results period. This was partly bogged down by REITs which carried out rights issue exercises, namely OUE Hospitality Trust and OUE Commercial REIT. Even if we exclude the performance of these two REITs, DPU growth for our remaining coverage came in at only 0.5% YoY. 
  • Besides corporate actions, we note that the industrial and hospitality sub-sectors registered relatively weak results in general. With the exception of Mapletree Industrial Trust, other industrial REITs under our coverage saw negative DPU growth, and this can be attributed to reasons such as conversion of single-tenanted buildings to multi-tenanted buildings as well as downsizing by oil and gas tenants. 
  • Despite some uplift to hospitality REITs from the Singapore Airshow which takes place biennially, the lacklustre corporate segment demand and competitive environment culminated in a drag on RevPAR figures.

Rentals still facing pressure

  • Given muted macroeconomic conditions and oversupply concerns across the various sub-sectors, it was unsurprising that rentals continued to face downward pressure. 
  • According to property consultant CBRE, Grade A CBD core office rents dipped 4.8% QoQ to S$9.90 psf/month, representing the fourth consecutive quarter of sequential decline. 
  • On the retail front, the URA retail rental index registered QoQ declines across both the Central Area (-2.1%) and Fringe Area (-1.4%). JTC’s rental index showed QoQ dips of a wider magnitude as compared to 4Q15 across all segments, with the exception of Warehouse. 
  • REIT managers have also largely sounded a cautious tone on the outlook ahead.

Maintain NEUTRAL; expect continued volatility

  • We maintain our NEUTRAL rating on the S-REITs sector, and expect continued volatility amid soft market conditions and a tough operating environment. 
  • We keep Frasers Centrepoint Trust [BUY; FV: S$2.25] and Keppel DC REIT [BUY; FV: S$1.24] as our top picks. 
  • Following our downgrade of one of our previous top picks Mapletree Logistics Trust [HOLD; FV: S$1.02] on 3 May 2016 on account of its strong share price outperformance and uncertain outlook, we replace it with Ascendas REIT [BUY; S$2.58].

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-05-19
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 2.58 Same 2.58
BUY Maintain BUY 2.25 Same 2.25
BUY Maintain BUY 1.24 Same 1.24