Singapore REITs - DBS Research 2017-06-12: Thai Investors Were In Town !


Singapore REITs - Thai Investors Were In Town !

  • Thai investors gained an insight into Singapore’s property market.
  • Property sector approaching a cyclical bottom; abating supply risk in 2018 a key driver to faster growth prospects.
  • Maintain cyclical bias with our overweight exposure in office, selected industrials, and hotels.
  • Our picks: Keppel REIT (KREIT), Mapletree Logistics Trust (MLT), CDL Hospitality Trusts (CDREIT), and Frasers Logistics & Industrial Trust (FLT).

Familiarisation trip for Thai investors. 

  • We hosted a group of close to 15 investors from Thailand to a 3-day property roadshow in Singapore. The visits covered meetings with various S-REIT managers, and viewings of several properties exposed to different real estate sub-sectors across the island.
  • We believe that investors went away with a better grasp of the current operating environment and outlook for each sector in the medium term.

Singapore’s property market approaching a cyclical bottom. 

  • We believe that the Singapore property market is approaching a cyclical bottom in 2018 on the back of abating supply risk. With GDP projected to continue growing at 2.5%- 2.8% per annum over the next two years, this bodes well for cyclical sectors like hotels and office space where demand correlates more closely to a more buoyant economic environment. 
  • We also expect better prospects for industrial REITs in 2018 given improving business expectations from manufacturers which could result in expansionary demand ahead. The sweet spot appears to be in the Business Parks space where firms in the Technology, Media and Telecom (TMT) sector continue to drive demand for space.
  • Retail landlords are more generally cautious given the ongoing challenges faced by retailers but we believe that suburban space could be more resilient in the medium term.

Strong interest in REITs to continue. 

  • The performance of SREITs as denoted by FSTREI Index rose 10% YTD. We expect buying interest for S-REITs will continue in the immediate term driven by 
    1. high yield spread of 4.4%, and 
    2. attractiveness from the continued strength of the SGD. 
  • Outperformance, in our view, will hinge on the S-REIT’s potential to post higher earnings growth (organically or through acquisitions). We like CDREIT (BUY, TP 1.75) given the expected turnaround in its earnings. 
  • We continue to be vested in landlords like K-REIT (BUY, TP S$1,23) and REITs with attractive acquisition prospects like MLT (BUY, TP S$1.28) and FLT (BUY, TPS$ 1.10).

Singapore REITs performance 

  • Market turned their attention towards developers at end 2016-early 2017 on the back of positive industry data-points.
  • S-REITs’ performance caught up post 1Q17 on the back of rotational interest after a 25% rise in share prices of developers.
  • Positive GDP data from Singapore economy led to investors taking risker bets in the REIT space.
  • S-REIT sector is trading close to 1.0x P/NAV, which is in line with its historical trading range.
  • S-REITs are trading at close to 6.3% yield, in line with the historical trading range.
  • Recent rally in share price brought yields down from close to 6.5%-6.7% since the start of the year.

Singapore Property Clock 

  • We believe that the property market will bottom out in 2018 with a fall-off in supply in majority of sectors (office sector, hotels sector and industrial sector). This is supportive for higher rents going forward.
  • We believe that more cyclical sectors like hotel and office will lead the recovery given that demand for rooms and office space is more co-related to the economic outlook.

Hotel Sector supply is tapering off 

  • Incoming hotel room supply is expected to taper off to only a mere 1-2% in 2018-2019, close to a third of the annual growth of 5%-6% in the past few years. We see this as a turning point for hoteliers and project RevPAR to rise by 4% in 2018 after seeing downward pressure over the past few years.
  • In addition, with the return of major conferences and events in 2018, we expect corporate demand to pick up in 2018, which will be supportive for room rates going forward.

Office sector to see low level of new supply additions up to 2020 

  • After 2 years of high concentration of supply completions where close to 4.5m square feet of new supply was added to the market, the office sector will see minimal new supply additions up till 2020. This is supportive for an upward trajectory in rentals from 2018 onwards.
  • With pre-commitment rates for new buildings completing in 2017 at a high of c.60%, we believe that downside risk to market rents is abating.

Industrial space is seeing slower additions

  • After achieving a peak in 2017, new industrial supply will drop by close to 50% in 2018 and further in 2019.
  • The fall off mainly comes from the warehouse and business park space where completions will peak in 2017.
  • With a fall in supply for industrial stock, we expect market rents to stabilise and rise marginally in 2018.

Retail space is seeing increasing competition 

  • The retail sector is expected to see increasing competition in the coming years on the back of completions of major malls in 2017-2019.
  • We note that a majority of new malls are part of an integrated development and thus likely to be mainly captive in nature. However, we note that large scale malls like Changi Jewel, Northpoint City are likely to be able to attract shoppers beyond their captive market and thus would cannibalise traffic from the surrounding malls.
  • In addition, retailers remain in a consolidation mode which will mean higher vacancy rates going forward. We believe that malls with a large operational scale and located near train and bus interchanges will remain more resilient.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-06-12
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