Singapore REITs - DBS Research 2017-05-17: Cycling Up


Singapore REITs - Cycling Up

  • Maintain cyclical bias with overweight exposure to the Office and Industrials sectors.
  • Be early with hospitality stocks.
  • Wide yield spreads underpin investment case for S-REITs.
  • Top picks – Large cap: AREIT, KREIT and MLT; Mid cap: KDCREIT, FLT and CDREIT.

Maintain exposure to cyclical sectors as we see continuing momentum from strong Singapore GDP. 

  • In our previous S-REIT strategy report (Catalysts abound – 17 March 2017), we had advocated investors to increase their cyclical exposure, namely to the office and industrial sectors, on the back of better GDP growth prospects.
  • Our strategy appears to be working as shown in the Ministry of Trade and Industry’s advanced estimates which reported that Singapore’s 1Q17 GDP grew by 2.5% y-o-y, above initial estimates. Since then, we have been seeing consensus raising estimates for Singapore GDP since the start of the year. In addition, latest posturing from our government implies that 2017 growth could come in at the higher end of GDP estimate of 1-3% and can also be read positively.
  • The improvement mainly came on the back of a 6.6% y-o-y jump in manufacturing activities which is an encouraging read-through for future demand for industrial space if the positive momentum is sustained for the remainder of the year. The improvement in manufacturing and steady growth in the services producing industries (up 1.5% y-o-y in 1Q17) should also help drive incremental demand for office space.
  • Coupled with expectations of easing supply as highlighted in our previous note, we believe heading into 2018, there is improving prospects of a recovery in spot market rents for the high-spec industrial, business park and Grade A office properties. We believe this will trigger a further re-rating of the office and industrial REITs.

Our “Dark Horse” call on hospitality appears to be turning out as planned. 

  • In our marketing earlier this year, apart from a taking a more positive stance on the office and industrial (business park) sectors, we had highlighted the hospitality sector as a potential dark horse for 2017 given expected easing supply pressures while the sectors seemed to be somewhat “under-owned” among investors back then.
  • Since then, we are sensing a slow basing out of the hospitality sector. Over the recent results season, the Hospitality REITs are either coming in line or being ahead of expectations and CDREIT’s share price has jumped c.20% since the start of the year. 
  • With another seven months till the start of 2018, we believe investors will increasingly start to position for a potential recovery as supply pressures ease (1% new room supply versus 6% in 2017) and the Singapore hospitality market benefits from increased demand with 2018 being the biannual conference year. 
  • Moreover, valuations for hospitality REITs remain depressed, trading at 10% discount to book value with average yield of 6.6% on cyclical low revenue per available room (RevPAR).

Fall in RevPAR for hoteliers but weakness appears to be priced in 

  • The hospitality S-REITs had a slow start to the year with declines in RevPAR for their Singapore portfolio (-11% to -1%).
  • However, DPU performance was mixed. ART and FHT reported falls in DPU largely due to dilution from recent equity raisings, while CDREIT and OUEHT registered a jump in DPU owing to the low-base effect and earnings boost from acquisitions made in the prior year. With share prices largely stable, post results, it appears the expected weakness due to the oversupply situation in Singapore may have been priced in.

Further twist and turns ahead of consolidation of the industrial sector. 

  • As highlighted in our previous S-REITs strategy report, we believe with the emergence of Warburg Pincus as the majority owner of various REIT managers (Cambridge and ARA Asset Management) and its potential collaboration with Mr Tong Jinquan (who owns large stakes in various industry REITs), may trigger a consolidation of various mid-cap industrial REITs into a giant industrial REIT. 
  • The potential first step was the removal of Viva Industrial Trust’s manager and replacement with the manager of another listed REIT. However, with resolution failing, we believe the consolidation may be delayed temporarily as Viva Industrial Trust completes its strategic review and its manager decides on its next step.

Sentiment towards the office outlook turning more positive 

  • Over the recent reporting season, the office REITs largely met our/market expectations. In addition, despite spot Grade A CBD office rents falling 10% y-o-y and 2% q-o-q to S$8.95 per sqft per month, investors and office landlords have turned more positive on the office outlook with increasing confidence that we are approach as cyclical low. This is largely on the back of better than expected pre-commitment levels in the new office properties under construction. Marina One, DUO Tower and Frasers Tower are reported to have achieved 60%, 45% and 40% pre-commitment levels (including leases in advanced negotiations) respectively.
  • Soft retail environments show up with negative rentals reversions for CMT and flattish DPU. The weakness in the retail environment over the past couple of years finally showed up with CapitaLand Mall Trust (CMT) reporting 2.3% negative reversions. However, as this risk had been well flagged, investors' reaction was muted. DPU performance was also generally flattish y-o-y with Starhill reporting a 6% y-o-y drop (drag from Wisma Atria and lower office occupancies).

Diverging performance between large-and mid-cap industrials. 

  • Over 1Q17, the gap between the large and smaller industrial S-REITs was noticeable, with an increase in DPU for the AREIT, MLT and MINT, while the Cambridge, Cache and Soilbuild REIT reported falls in DPU. The better performance for the large-cap industrial REITs was mainly driven by acquisitions.
  • Conversely, the difficulty in raising equity for the smaller industrial REITs had constrained their ability to acquire to offset the impact from falling spot rents.

SREIT 1Q17 Results Summary - DBSV

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2017-05-17
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.650 Same 2.650
BUY Maintain BUY 1.230 Same 1.230
BUY Maintain BUY 1.280 Same 1.280
BUY Maintain BUY 1.300 Same 1.300
BUY Maintain BUY 1.100 Same 1.100