Property/REITs - UOB Kay Hian 2016-07-08: Pandora’s Box ~ Untangling Singapore Property/REITs' Exposure

Property/REITs - UOB Kay Hian 2016-07-08: Pandora’s Box ~ Untangling Singapore Property/REITs' Exposure Singapore Property Singapore REIT CDL HOSPITALITY TRUSTS J85.SI  CITY DEVELOPMENTS LIMITED C09.SI  ASCENDAS REAL ESTATE INV TRUST A17U.SI  CAPITALAND LIMITED C31.SI  KEPPEL REIT K71U.SI 

Property/REITs - Singapore: Pandora’s Box: Untangling Singapore Property/REITs’ Exposure

  • Rising expectations of a prolonged low interest rate environment amid increased uncertainties as Brexit unfolds will see continued interest in property/REITs in Singapore. 
  • The increase in the required return for the UK/Europe exposure is more than compensated for by the built-in buffer and the drop in the risk-free rate. The UK commercial segment is likely to be most at risk. 
  • Maintain OVERWEIGHT with CapitaLand, City Developments, AREIT, CDREIT and KREIT as our top picks.


 Beneficiaries of prolonged low interest rate environment. 

  • The rising expectations of a prolonged low interest rate environment amid increased uncertainties as Brexit unfolds will see continued interest in property/REITs in Singapore. The increase in the required return for UK/Europe exposure is more than compensated for by the built-in buffer and the drop in the risk-free rate. 
  • Maintain OVERWEIGHT with CapitaLand, City Developments (CDL), Ascendas REIT (AREIT), CDL Hospitality Trust (CDREIT) and Keppel REIT (KREIT) as our top picks.


 Low impact from currency translation. 

  • Companies with significant exposure to the eurozone under our coverage include Ho Bee Land (30% of GAV in the UK), CDL (12% of GAV in Europe, 11% in the UK), Ascott Residence Trust (28% of GAV in Europe, 11% in the UK) and Frasers Hospitality Trust (24% of GAV in Europe, 19% in the UK). 
  • The impact of currency translation is low due to the natural hedge in place. 
  • On the income side, a 10% depreciation of the pound against the Singapore dollar will likely result in a 1.4-2.9% negative impact on earnings.


 Office segment most at risk relative to hospitality and residential. 

  • We opine the potential loss of access to the EU’s single market could jeopardise London’s standing as the financial hub of Europe. Comparatively, while the likelihood of a slowdown in the hospitality and development segments could be imminent, these segments are also likely to be somewhat buffered by the potential pick-up in leisure travel and overseas buyers (China, the Middle East). 
  • A 10% drop in hotel RevPAR, commercial and residential prices will result in a 0.7-4.3% impact on valuations, with Ho Bee Land the most affected and CDREIT the least affected among stocks with UK/Europe exposure under our coverage.


 Higher risk premiums offset by lower risk-free rate. 

  • The SG 10Y rate has dropped 31bp from 2.04% to 1.73% over the past two weeks on expectations of a prolonged low interest rate environment amid increased uncertainties as Brexit unfolds. 
  • We are using a risk-free rate of 3% that provides a 100bp buffer for the risk-free rate. The increase in the required return for UK/Europe exposure due to the heightened risk profile is more than compensated for by the drop in the risk-free rate. We leave our valuations unchanged as we believe the buffer is sufficient to factor in a higher required return from UK/Europe exposure. 
  • Our sensitivity analysis indicates that a 50-100bp increase in the risk premium will lead to a 7.2-14.3% correction in our target prices.




PEER COMPARISON 





Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-08
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.64 Same 2.64
BUY Maintain BUY 10.36 Same 10.36
BUY Maintain BUY 4.05 Same 4.05
BUY Maintain BUY 1.55 Same 1.55
BUY Maintain BUY 1.22 Same 1.22


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