REITS - RHB Invest 2016-12-05: Recent Weakness Presents Buying Opportunities


REITS - Recent Weakness Presents Buying Opportunities

  • S-REITs have corrected by 3% since the US elections amid a global shift in demand away from low risk yield instruments. We believe the recent weakness presents buying opportunities and expect the sector to continue to be in favour in 2017. 
  • S-REITs currently offer an average FY17F yield of 6.6%, a 430 bps spread over 10-year government bond yields, and the highest among the global REIT sector. 
  • Our top picks are Ascendas REIT, CapitaLand Commercial Trust and Frasers Centrepoint Trust (FCT). 
  • In the small cap space we like Manulife US REIT and Viva Industrial Trust.

Recent correction means buying opportunities. 

  • S-REITs sector share price has fallen ~3% on average post the US elections (8 Nov) on expectations that a Donald Trump presidency would result in a pro-growth inflationary environment in the US. This has resulted in a shift in favour of high-risk equities away from low-risk yield instruments, with US Treasury yields (10-year) spiking nearly 50bps since 8 Nov. 
  • With an uncertain global economic outlook, we believe S- REITs would continue to remain in favour 2017 and see the recent share price weakness as a good re-entry level for long-term investors.

Impact of a 50bps Fed Funds rate hike largely priced in. 

  • Currently, S-REITs are trading at a 430 bps premium to Monetary Authority of Singapore (MAS) 10- year bond yields compared to the 10-year average spread of 400bps (excluding global financial crisis peaks). The sector also offers the highest absolute yields among the REITs sector globally. 
  • With yield spread remaining above average levels, we believe REITs have largely factored in the impact of a 50bps Fed Funds rate hike next year. 
  • We recommend a bottom up approach in selecting S-REITs and expect those with strong balance sheets, good quality portfolios and stock specific catalysts to outperform their peers.

Industrial – business parks segment the bright spot. 

  • Among industrial sub-sectors, we prefer REITs with exposure to the business parks segment. 
  • Demand supply dynamics remain favourable in this segment, with very limited (~120,000 sqf) supply coming on-stream over the next two years, and we expect rents to increase by 1-5% in 2017. For the factory and warehouse logistics segment, we expect rents to decline by 3-7% in 2017, with supply remaining elevated amid weak overall demand. 
  • Ascendas REIT remains a top pick due to its diversified industrial property exposure. 
  • We also prefer Viva Industrial Trust for its favourable exposure to the business parks segment and its high dividend yields (~10% for FY17F).

Office – Headwinds persist but impact buffered. 

  • We expect office rents to remain under pressure in 2017, with rents to decline by 5-10% on the back of persistently high supply. About 3m sqf of office supply is coming on-stream next year compared to the 10-year average demand of 1.25m sqf. A likely bottom for office sector rents could come in early 2018, with a slight ease in supply. 
  • Despite the overall negative sector outlook, office REITs under our coverage have mitigated risks by forward renewing most of their leases. 
  • CapitaLand Commercial Trust is our top sector pick as we expect it to unlock shareholder value via redevelopment of Golden Shoe Car Park and AEIs at Raffles City.

Retail – Challenging environment but suburban malls more defensive. 

  • We expect suburban malls to stay resilient despite the challenging overall retail climate. The key reason is that suburban malls are driven more by necessity spending and cater to the local catchment population. 
  • The September retail sales index (seasonally adjusted) declined 0.7% MoM (+2% YoY), with broad weakness seen in the watches & jewellery segment, optical goods, and books and department stores. We expect retail sales growth to remain sluggish in 2017 with the economy projected to grow at a modest 1.8%, based on the latest MAS survey.
  • Despite underlying weakness, retail REITs under our coverage continued to record positive rental reversions, suggesting strong brand positioning and adaptability to the changing retail landscape. 
  • Our top pick for the sector is Frasers Centerpoint Trust (FCT SP, BUY, TP: SGD2.22), owing to its strong suburban mall portfolio, solid balance sheet and potential upside from redevelopments and acquisitions.

Hospitality – Demand-supply dynamics remain unfavourable. 

  • We expect hotel RevPARs (revenue per available room) to remain under pressure in 2017 due to:
    1. Increased competition from new supply of hotel rooms (3,871 rooms coming on- stream in 2017); 
    2. Weakening demand from corporate travel; iii. Shortening average length of stay (ALOS).
  • Overall, we expect RevPARs to continue decline by 3-5% in 2017 on the back of the above-mentioned factors. Despite hotel REITs trading at low valuations (offering high dividend yields) we expect the sector to continue being out of favour, amid a lack of catalysts.

Manulife US REIT – A better proxy to the US economy and rate hikes. 

  • Being the only listed REIT in Asia offering 100% exposure to US office properties and USD exposure, we believe Manulife US REIT (MUST SP, BUY, TP: USD0.96) offers the best proxy to a growing US economy. 
  • The impact of a rate hike also should be mitigated, as this would coincide with pick-up in US office demand and a potential strengthening of the USD benefitting unit holders.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-12-05
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