Singapore REITs - UOB Kay Hian 2017-05-25: Rosier Economic Outlook, S-REITs In The Spotlight?

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Singapore REITs S-REIT Recommendation S-REIT Terminal Growth A17U.SI CAPITALAND COMMERCIAL TRUST C61U.SI FRASERS LOGISTICS & IND TRUST BUOU.SI FRASERS HOSPITALITY TRUST ACV.SI ASCOTT RESIDENCE TRUST A68U.SI CACHE LOGISTICS TRUST K2LU.SI CAPITALAND MALL TRUST C38U.SI CDL HOSPITALITY TRUSTS J85.SI FRASERS CENTREPOINT TRUST J69U.SI KEPPEL REIT K71U.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI MAPLETREE LOGISTICS TRUST M44U.SI PARKWAYLIFE REIT C2PU.SI SUNTEC REAL ESTATE INV TRUST T82U.SI

Singapore REITs - Rosier Economic Outlook, S-REITs In The Spotlight?

• We have raised our S-REITs target prices by about 8% on average on the back of a rosier economic outlook in Singapore, as we raise our long-term growth expectations by 60bp. 
• We opine that S-REITs may be viewed as growth vehicles (instead of the more conventional yield plays). 
• We upgrade Frasers Centrepoint Trust (FCT) and Parkway Life REIT to BUY and downgrade Cache Logistics Trust (Cache) to HOLD. 
• We remain OVERWEIGHT on REITs with Ascendas REIT (AREIT), Capitaland Commercial Trust (CCT), Frasers Logistics & Industrial Trust (FLT) and Frasers Hospitality Trust (FHT) as our top picks.

WHAT’S NEW

• Upward revision of S-REIT terminal growth forecasts on the back of strengthening Singapore economic data and estimates.
• Robust US non-farm payroll data released last week exceeded consensus estimates by 14.1%. US unemployment has also hit a record low (since May 07)
• Bloomberg Fed Fund Futures indicate 100% probability of a rate hike next month.

ACTION

Maintain OVERWEIGHT, shift towards upcycle as REITs viewed as growth vehicles. 

• We raise our S-REITs target prices by an average 8% by imputing growth of 60bp into our terminal growth assumption, taking into account our UOB economists’ rosier Singapore GDP growth targets. 
• Downgrade Cache Logistics to a HOLD (lower occupancies at multi-tenanted buildings) and upgrade FCT and Parkway Life REIT to BUY on valuation grounds. 
• AREIT, CCT and FLT remain our top picks.

ESSENTIALS

Increasing terminal growth assumptions by 60bp across our S-REIT coverage (excluding FLT). 

• This mirrors UOB Global Economics and Markets’ 60bp upward revision in 2017 GDP growth target (from 1.8% to 2.4%). We have, however, revised terminal growth rates by 30bp for retail REITs under our coverage over sector headwind concerns.

GDP growth targets picking up steam in Singapore. 

• The UOB Global Economics and Markets team recently lifted its 2017 Singapore GDP growth target, with the increased optimism stemming from growth in the tradeables sector (electronics segment). 
• We note that a resilient global economy would have positive ramifications on Singapore, especially as exports accounted for 176% of GDP in 2016, according to the World Bank.
• We also note that Singapore has seen inflation turn positive since Dec 16, reversing 24 consecutive months of negative inflation (Nov 14-Oct 16).

S-REITs to transition from being viewed as yield vehicles to growth vehicles

• S-REITs to transition from being viewed as yield vehicles to growth vehicles, especially in light of encouraging US and Singapore economic data, with Fed fund futures implying a 100% likelihood of a hike next month. 
• Despite the prospects of a rate hike in June, the market could likely view REITs as growth vehicles (instead of the more conventional yield play) and we opine that REITs could continue to be an attractive asset class. Yield compression to the upcycle average spread of 2.8% implies over 23% upside potential for REITs.
• We prefer deep-value and diversified REITs like CCT and FLT, and those with significant business park exposure, namely AREIT. 
• We opine that AREIT’s business/science park and hi-tech portfolio (48% of overall portfolio value) will position it defensively against the slowdown in Singapore from the unprecedented simultaneous supply glut across other industrial segments.

Historical gap between US and domestic interest rates suggests healthy buffer.

• Data stretching back to 2002 highlights an average 73bp spread between 10-year treasuries and 10-year Singapore Government Securities (SGS). This leaves room for 10- year SGS to stay put while 10-year treasuries rise by up to 73bp for the relation to revert to its long-term historical trend. 
• Besides, FFTR rate hike impact has been muted on 10-year treasuries in the past. When the Fed raised the FFTR by 430bp from 1% in mid-04 to 5.3% by mid-06, yields on 10-year treasuries barely rose 50bp from 4.7% to 5.2%. 
• We are likely to see a flattening of the yield curve with the long end (10-year SGS) relatively unchanged and the short end rising following the FFTR increase. As a result, REITs that typically derive their interest cost from the 3-year to 5-year SGS will be less affected.

Positive US REIT and S-REIT returns during rate hike cycles

• Positive US REIT and S-REIT returns during rate hike cycles, with US REITs (FTSE NAREIT All Equity Total Return Index) doubling from mid-04 to end-06 when US FFTR rose 425bp from 1% to 5.25%. US REITs also gained 3% during the previous rate hike cycle in mid-99 to mid-2000 when FFTR rates were hiked 175bp to 6.5% from 4.75%.
• Similarly, S-REITs rallied in the last rate-hike cycle, with the FTSE ST REIT Index surging 83% from 500 in mid-04 to 914 by end-06, despite the 3M SIBOR more than tripling, rising from 0.75% to 3.44% over the same period. As REITs rallied, yields were compressed by 230bp, falling from 7% in mid-04 to 4.66% by end-06. 
• The present cycle is different with regard to the outlook of growth being relatively better for US economy. However, the interdependencies as highlighted earlier would limit the number of rate hikes planned by the Fed, keeping REITs attractive as yield instruments. 
• When the rates eventually rise on back of global growth, REITs will come in focus as equity instruments.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-25

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