Singapore Property & REITs - DBS Research 2017-08-28: Firmer Fundamentals


Singapore Property & REITs - Firmer Fundamentals

  • As proxies to improving residential market sentiment, we expect developers to continue trading up.
  • Fundamentals for most sectors continue to firm; office and hotel sub-sectors seeing most upside.
  • Picks UOL, City Dev for residential exposure.

Investors still positive on the property sector. 

  • We were marketing the property sector to investors across Asia over the past few weeks. 
  • Despite the run-up in share price for both developers and S-REITs, investors remain positive on the property sector and would still like to increase their exposures to developers if prices weaken in the near term. 
  • In the S-REIT space, investors appear prefer the office and hospitality sub-sectors given the expected recovery in physical market, although we have seen interest in retail REITs given that share performance have lagged other sub-sectors year-to-date.

Property developers to continue to see upside. 

  • Due to the close correlation between developer P/NAV and market transaction volumes, we see the projected higher transaction velocity in 2H17-2018 translating to higher developer valuations as a whole. At P/NAV of 0.9x and P/RNAV of 0.75x, we see potential to close the gap towards 1.0x (+1SD). 
  • Land-banking activities are expected to remain robust as developers look to replenish their land banks. 
  • We like UOL (BUY, Target Price S$8.73) and City Dev (BUY, Target Price S$12.63) given their relatively higher exposure in the residential space compared to peers.

Fundamentals turning around for most real estate sectors. 

  • We maintain our view that the office/business parks and hospitality sub-sectors will lead the recovery in the property market, aided by a larger fall-off in supply. 
  • With Singapore GDP projected to continue growing at a stable rate of c.2.5%, we see potentially stronger pre-leasing activities at office properties leading to an eventual recovery, by the end of which is a catalyst for office REITs (Keppel REIT, BUY Target Price S$1.23).
  • Industrial REITs with financial flexibility to pursue acquisitions/ redevelopments such as Ascendas REIT (BUY, Target Price S$2.85), Frasers Logistics Trust (BUY, Target Price S$1.15) and Mapletree Logistics Trust (BUY, Target Price S$1.28) will drive upside to earnings. 

A confluence of positives for hotel REITs. 

  • We see a confluence of positives for the hotel sub-sector going into 2018 and remain convinced of a turnaround in DPUs driven by
    1. recapitalized balance sheets (CDL Hospitality Trust and Ascott Residence Trust) offering higher propensity to deliver debt-funded acquisitions, and
    2. brighter RevPAR outlook implying that the sub-sector will enter an earnings upgrade cycle going into 2H17/2018. 
  • Our picks are CDL Hospitality Trust (BUY, Target Price S$1.75) and Far East Hospitality Trust (BUY, Target Price S$0.70).

Singapore Property Developers continue to ride positive market sentiment 

  • Share prices for the Property Developers (measured by the FSTREH Index) continue to head higher in 2017 and is up by close to 25% year-to-date (YTD). While stocks were generally off their peaks in June 2017, we believe that any near-term correction in prices are good re-entry levels to reconsider adding to property developers, given our positive stance on the residential sector.
  • There are two key reasons why developers outperform. 
    • Firstly, property developers' share prices rise as proxies to the sector as investors look for exposure to the rising sentiment in the sector. We have found a strong correlation with market volumes and prices and developer prices. 
    • Secondly, stock specific factors (i.e. land-banking activities, property launches) are also catalysts to drive price higher.
  • While developers’ shares have done well year-to-date (YTD) – up close to 25%, we continue to see catalysts to drive prices higher to closer to an average of 1x P/NAV, in line with their five-year historical mean. At that level, developers will be trading at an average P/RNAV of 0.9x. 
  • Catalysts will come in the form of higher transaction volumes, resulting in the clearing of unsold inventory or even higher prices. In addition, we view that successful land-banking activities that could mean potential reflation of NAVs, will further boost share prices. 
  • Our picks are City Dev (BUY, Target Price S$12.63), UOL (BUY, Target Price S$8.73), and CapitaLand Limited (BUY, Target Price S$4.35).

Singapore REITs: Firmer fundamentals 

  • The Singapore REITs (S-REITs) reported a 5% growth in distributions in 2Q17 with 7% and 8% y-o-y growth in revenues and net property income respectively. However, we note that the sequential performance has remained flattish but discussions on the outlook with various S-REIT managers indicate a general optimism that operational outlook is gradually turning around, in line with our expectations.
  • From an operational perspective, we saw stronger sequential performance from the industrial REITs, hotel REITs and selected REITs (KDC REIT, Manulife US REIT) whose results were boosted by contributions from past acquisitions. Organic growth momentum remained generally flattish for the retail REITs and office REITs.

Industrial REITs – still an acquisition-led growth story 

  • Industrial REITs reported a c.6% increase in revenues and net property income and also a sequential improvement of 1% in net property income. We note that the sequential improvement is seen across most industrial REITs that DBS covers, reporting a c.1-5% increase in net property income but we note that this was mainly driven by acquisitions over the past year. On a same store basis, organic growth remains weak while rental reversions are generally flattish to negative.
  • Looking ahead, while we see lower downside risks to vacancy rates across most REITs as the number of conversions from single-user factories to multi-user factories are tapering off, rental reversions are expected to still remain flattish to negative for most industrial sub-sectors. 
  • With balance sheets still supportive of debt-funded acquisitions, we believe that industrial REITs will likely remain trigger happy but acquisition opportunities are limited in Singapore and overseas (Australia, China or Japan), where REITs are keen to gain a foothold or deepen their presence in.

Hotel REITs – improved optimism for 2018 fuelled share price rebound 

  • Hotel REITs reported a 3% sequential growth in net property income collectively but we note that a divergence in performance among peers. We note that most hotel REITs saw weaker 2Q17 results with a majority of hoteliers reporting weaker sequential net property income. This was mainly due to continued pressure on average daily rates (ADRs) across hotels in Singapore. 
  • Key outperformer Ascott Residence Trust (ART) saw the contribution from past acquisitions but stripping that out, same-store performance would have remained lower.
  • Most importantly, most hotel REITs are also sensing that the booking pace at their hotels are also improving in 2H17 with most expecting to be able to price up average daily rates (ADRs) come 2018 on the back of a stronger line-up in meetings and conventions throughout the year. 
  • Coinciding with a drop-off in supply growth in 2018, we still believe that the inflection point in RevPAR for the hotel REITs will be reached in 2018 and that there is upside potential to our conservative RevPAR estimates for 2018.

Retail REITs – aiming for stability 

  • Retail REITs reported a c.-2% sequential dip in revenues and net property income which we believe could be transitional and not a cause for concern. We note that a retail REIT that reported a larger drop was Frasers Centrepoint Trust (FCT) Northpoint asset (-5% sequential dip in NPI). This was mainly due to the ongoing renovations at Northpoint which is a major contributor to FCT's top line.
  • Looking ahead, we believe that most REITs will be looking to maintain market shares and occupancies at their malls. 
  • Key challenges will be to limit the impact of e-commerce, especially with the launch of Amazon Prime in Singapore, possibly eroding profits from grocers in Singapore.

Office REITs – a 2018 story 

  • The office REITs reported a sequential 2% dip in revenues and net property income, mainly due to the effects of negative rental reversions across their respective portfolios. We note that the weighted average expiry profile (WALE) for most office REITs are long at above five years and expiries in FY18F are minimal at c.8-15% of NLA, implying that downside is likely to be limited, in our view.
  • With the number of expiries starting to hike up to c.12-33% in FY19, we expect positive rental reversions given that the office market is entering a period of “undersupply” over 2018-2020.

Derek TAN DBS Vickers | Rachel TAN DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-08-28
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