S-REITS 2H17 Outlook - CIMB Research 2017-05-30: Risk-On Or Risk-Off?


REITS - Overweight 

Key question: Risk-on or risk-off? 

  • Recent Trump political concerns, uncertainty over his fiscal plans and cloudy US growth amid mixed data have resulted in Fed speak turning somewhat dovish. We believe that the first two reasons could invoke the unwinding of the ‘Trump reflation’ trade and that S-REITs would provide good shelter if the markets were to switch to risk-off mode. 
  • In addition, ahead of a broader physical market recovery in 2018F, we reiterate Overweight on S-REITs.
  • Interest in S-REITs picked up after the FOMC Mar meeting, which communicated an accommodative policy. YTD, S-REITs have relatively underperformed the FSTREH and FSSTI, which gained 18.9% and 11.6%, respectively (vis-à-vis FSTREI’s 9.2%). However, since early-Mar, S-REITs have outpaced FSTREH (+3.5%) and FSSTI (+3%), gaining 6%. 
  • YTD, the top three out-performers in our coverage universe are Croesus Retail Trust CRT (+24%), CDL Hospitality Trust CDREIT (+20.5%) and Ascendas REIT AREIT (+14.1%). The under-performers are OUE Commercial Trust OUECT (+1.4%), Starhill Global REIT SGREIT (+1.4%) and Far East Hospitality Trust FEHT (+0.8%).
  • On interest rates, we maintain our forecast for two more rate hikes in 2017 and another three in 2018. According to the Fed’s dot-plot diagram, the committee is expecting three rate hikes this year, with a projected median fund rate of 1.375% for 2017. In addition, the Fed funds futures rate is pricing in a 98.8% probability of a 25bp rate hike in the coming Jun meeting. As a number of S-REITs are trading close to our respective target prices, we see any near-term share price weakness as decent entry points.
  • While balance sheet concerns are valid, we think that S-REITs’ capital management remains sound and refinancing is well staggered. Contrary to expectations, we observe that borrowing costs dipped in 1Q17 on the back of narrowing credit spreads and change in borrowing mix to cheaper overseas debt. 
  • We reiterate that the high proportion of fixed-rated debt (c.80%) insulates the REITs from rising rates over the next 12-18 months. Some S-REITs, such as Ascott Residence Trust ART and OUECT, have undertaken equity fund-raising to strengthen their balance sheets in the quarter while several, such as AREIT, ART, Capitaland Commercial Trust CCT, Cambridge Industrial Trust CREIT and Mapletree Logistics Trust MLT, recently undertook capital recycling. 
  • Furthermore, given the ample liquidity and precedent landmark transactions, such as the sale of Jurong Point at a reported 4.2% cap rate, we believe that cap rate expansion (on the back of rate increases) remains a medium-term risk.   

2H17 Outlook 

Our sub-sector views are unchanged. We expect business parks to recover first, followed by offices, retail, warehouses and then hotels.

  • According to CBRE, Grade-A office rents slipped 1.6% qoq and 9.6% yoy to S$8.95 psf pm in 1Q17. Based on URA, the office vacancy rate rose by 0.5% pt qoq to 11.6%. The deteriorating metrics (albeit on a more gradual basis) were within our expectations. 
  • We expect Grade-A office rents to decline to S$8.65 psf pm and the vacancy rate to peak at 13.2% at end-17F. Not surprisingly, office S-REITs experienced negative rental reversions in the quarter. For example, CCT’s Six Battery Road achieved committed rents of S$10.70-12.00 in 1Q17 vs. S$11.50-12.80 in 1Q14.
  • For the retail sub-segment, the URA retail rental index fell by 3% qoq and 10.2% yoy in 1Q17 while the vacancy rate rose by 0.2% pt qoq to 7.7%. Meanwhile, retail REITs reported uninspiring tenant sales in 1Q17. With the notable exception of CapitaLand Mall Trust CT (-2.3%) and Starhill Global REIT SGREIT’s Wisma Atria, most of the other retail REITs reported positive rental reversions. Given the structural challenges faced by the sector, we project rental reversions for retail REITs to moderate to low single-digits. We also expect the vacancy rate to rise to 8.9% at end-17.

Sentiment in the industrial sub-segment has improved with upbeat manufacturing data. 

  • Based on JTC, the rental index for all industrial fell by 0.9% qoq and 5% yoy. The vacancy rate for all industrial rose marginally by 0.1% pt qoq to 10.6%. The large-cap industrials REITs, which reported their full years in 1Q17, registered slight positive rental reversions and improvement in their Singapore occupancies. 
  • Additionally, portfolio valuations were stable with very slight tightening in cap rates. Recent capital-recycling moves mean that the larger-cap REITs will be in an acquisitive mood in 2H17.

According to STB, visitor arrivals grew by 4% yoy in 1Q17 vs. our full-year forecast of 2% for 2017. 

  • The overall hotel industry recorded a 0.4% yoy improvement in RevPAR for 1Q17 vs. our full-year forecast of a 3% yoy decrease for 2017. Digging deeper, however, the picture was mixed, with luxury hotels recording a 5% yoy improvement in RevPAR while mid-tier hotels booked a 4.1% yoy decline in RevPAR. 
  • The uneven picture also filtered down to the hotel S-REITs, with CDREIT reporting a 0.8% yoy decline in RevPAR for 1Q17 while FEHT posted a steeper 4.6% yoy decline. Given the c.5-6% increase in room supply this year, we only expect RevPAR to recover from 2H18 onwards.

Our preferred picks remain Frasers Logistics Trust (FLT, Rating: Add,  Target Price S$1.10) and Mapletree Greater China Commercial Trust (MAGIC, Rating: Add, Target Price S$1.14). 

  • Given CDREIT’s YTD outperformance, we replaced the former with Frasers Logistics Trust FLT in our top picks list. 
  • We like FLT as it is the largest pure-play proxy for the favourable Australian industrials supply-demand dynamics. Given its in-built rental escalations, a defensive lease expiry profile and relatively longer WALE, we expect FLT’s performance to remain steady. Catalysts could include EPS-accretive acquisitions. 
  • Meanwhile, we still like Mapletree Greater China Commercial Trust MAGIC for its resilient portfolio, backed by Festival Walk. We also deem MAGIC a unique proxy for both the nascent Hong Kong retail recovery (which has showed initial signs of bottoming out) and US$ strength. Downside risks are a weaker-than-expected Beijing office market.
  • Lastly, we are including Mapletree Commercial Trust MCT in our preferred picks to reflect our Overweight stance in the sector. We upgraded MCT (Rating: Add, Target Price: S$1.70) during its 1Q17 results review. We like MCT’s portfolio as it has a good blend of resilience (through the more stable business park rents) as well as growth coming from Vivocity. We believe that Vivocity and Mapletree Business City will continue to deliver stronger growth against peers. Catalysts could include faster-than-projected rental uplift.


  • A broad recovery in physical markets could result in sector yield compression, even though earnings could lag.
  • Momentum of rental reversion turning positive.
  • Accretive acquisitions. Focus on S-REITs which have healthy balance sheets and acquisition pipeline. 


  • Higher-than-expected interest rate hikes.
  • Turn in cap rate cycle.
  • Slower-than-expected Singapore GDP growth.


Singapore Research CIMB Research | http://research.itradecimb.com/ 2017-05-30
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