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

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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

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