Navigating Singapore > S-REITs - CIMB Research 2017-12-14: Resume Running On Twin Legs

Navigating Singapore S-REITs - CIMB Research 2017-12-14: Resume Running On Twin Legs Singapore REITs SREIT Outlook 2018 FRASERS CENTREPOINT TRUST J69U.SI FRASERS LOGISTICS & IND TRUST BUOU.SI FAR EAST HOSPITALITY TRUST Q5T.SI

Navigating Singapore > S-REITs - Resume Running On Twin Legs

S-REITs has had a good run YTD, recording a 24.9% total return YTD.

  • Valuations have reverted to mean with the S-REIT sector delivering FY17F dividend yield of 5.5% and P/BV of 1.07x. The sector’s strong performance was due to narrowing of yield as the 10-year bond yield compressed from 2.4% in the beginning of 2017 to 2.1% in Dec and narrowing of yield spread from 430bps at the start of the year to 340bps currently.
  • S-REITs, on the whole, delivered fairly stable results for 9M17 as rental growth performed in line with our expectations, augmented by inorganic growth drivers.
  • We project S-REITs to deliver FY17F DPU growth of -0.7% compared to the +1.8% in FY16. The dip was likely due to the adverse impact of negative rental reversions in office and industrial sectors, weaker hospitality performance, income vacuum from asset enhancement initiatives and asset sales, partly offset by contributions from new acquisitions and divestment gain payouts. 
  • Moving forward, we project S-REIT DPU to expand by 2.2% in 2018 and 2.1% in 2019, led by full-year contributions from new acquisitions made in 2017, the completion of asset enhancement exercises, as well as positive rental momentum as the oversupply concerns dissipate.
  • Aggregate leverage ratio stood at 33% at end-3Q17 and we expect it to remain in the 33-35% range, even after taking account the acquisitions completed post3Q17. Given the strong market liquidity and robust investor appetite, most acquisitions were accompanied by some component of equity fund-raising, which kept leverage low.
  • S-REITs are well hedged against the rising interest rate environment, with c60- 99% of their debt on fixed rates. Debt maturity profile average 3 years, thus providing good visibility on potential credit cost pressures.

S-REITs Outlook For 2018 

Interest rate recalibration to be orderly 

  • Our fixed income strategists indicated in CIMB’s macro and strategy outlook report titled “2018: Sensibilities at the exit queue” on 17 Nov 2017 that “2018 will continue to witness the withdrawal of easy monetary policy through both the interest rate and QE mechanisms as the US FOMC, ECB and BoJ are likely to maintain an orderly recalibration... Our central case is for policy normalisation to be protracted, gradual, and at varying speeds, amid an in-comprehensive global economic recovery. In the absence of exciting catalysts from monetary policy, trade and government spending will remain important factors for market analysis in 2018. Geopolitical and political risk events will also be an important part of alpha calculus.…”.
  • Against this backdrop and post-valuation normalisation in 2017F, we expect SREITs to perform in line with the broader market in 2018.

S-REIT sector DPU to return to growth track in 2018 

  • Historically, S-REITs’ share price performance moved in close tandem with earnings growth outlook. Based on our current DPU projections, which do not factor in any new acquisitions, the hospitality sector offers the best DPU growth prospects for 2018, followed by the industrial and office sectors.

Office remains our sub-sector top pick, hospitality moves up to second place 

  • In terms of sub-sector ranking, we continue to prefer office exposure due to the supportive supply/demand dynamics for rental expansion. 
  • We have the moved hospitality sub-sector up to second place on the back of clearer RevPAR growth momentum. 
  • The industrial and retail sub-sectors fall in line after that.


  • As Singapore gradually moves past the wall of new supply that entered the market in the past 2-3 years, we expect rental recovery to be uneven in 2018F. 
  • Office rents started to improve in 3Q17. We expect the upturn to continue, closing the negative reversion gap in 2018F, as we project office rentals to rise by 5-10% during the year. The improvement is likely to be led by the core central business district (CBD) area as new supply dries up (until 2021F) and new builds are now largely pre-committed. 
  • City fringe and non-prime office rents may lag overall sector recovery in the near term, with the ongoing flight to quality. That said, we think non-CBD spot rents would remain stable from now on. However, with office REIT yields compressing to 4.4-5.0% for FY18, we believe much of the expected rental recovery could be priced in. 
  • Among the laggards, we prefer Keppel REIT (KREIT, Rating: Hold, Target Price: S$1.25) and among the landlords, we favour UOL Group Ltd (UOL, Rating: Add, Target Price: S$9.62) is our preferred exposure into this sector.


  • Visitor arrivals continued to be healthy, increasing by 4% yoy in 8M17, led by the Chinese as Singapore’s top-sourced market. We expect tourist arrivals growth momentum to sustain in 2018F and project an increase of 3%. 
  • Meanwhile, the supply of new hotel rooms in 2017F is likely to be fully operational in 2018, while the new supply is expected to taper off in 2018 to 1.7% total room stock growth vs. a 5-year CAGR of 5.1% (2012-17F). Hence, we raise our 2018 REVPAR growth projection to 5% vs 3% previously. 
  • Far East Hospitality Trust (FEHT, Hold, TP: S$0.69) is our preferred pick in the sub-sector with its laggard valuation vs. peers, with potential upside risk to earnings should the earnings accretive acquisition of Oasia Hotel Downtown occur. We have not factored this into our current earnings estimates.


  • DPU growth for industrial S-REITs continues to be driven by inorganic growth as they continue to acquire assets both in Singapore and overseas. 
  • In Singapore, while the manufacturing PMI has gained in strength YTD, on-the-ground sentiment remains mixed, based on our checks. We project new supply of factory space to moderate in 2018F. While new warehouse completions peaked in 2017F, we believe that 2018F will be a year of digestion. Hence, we project multiple-user factory space rents to stabilise in 2018F, while warehouse rents are likely to continue to ease by 3% over the same period.
  • Given the patchy organic rental growth performance of industrial S-REITs, we prefer those with inorganic growth prospects. Among the big-caps, we prefer Ascendas REIT (AREIT, Hold, TP: S$2.72) as it has been a relative laggard vs. peers. Additionally, we continue to favour Frasers Logistics Trust (FLT, Add, TP: S$1.20) due to the favourable Australian industrials sub-sector dynamics and its ability to tap into its sponsor’s Australian development pipeline.


  • We project retail S-REITs to deliver average DPU growth of 1.6% in FY18. We expect this to largely come from the resumption of earnings growth following the completion of asset enhancement initiatives, particularly at Frasers Centrepoint Trust (FCT)’s Northpoint North Wing, as well as organic rental improvement at FCT’s other properties, Mapletree Commercial Trust (MCT)’s VivoCity and SPH REIT’s portfolio of properties. 
  • While overall retail rents could continue to slip in 2018F, we believe retail S-REITs would achieve slight improvement in rents due to their more active mall management efforts to drive tenant sales and shopper traffic.

Low cost of capital heightens inorganic growth driver 

  • Cost of capital has declined as the recent run-up in S-REIT share prices has pushed P/V multiples above 1x P/BV, thus making equity an effective form of currency. In addition, debt funding cost has remained low. 
  • With a positive yield gap between cap rates and overall funding costs, we expect S-REITs’ inorganic growth prospects to remain bright. In Jun-Dec 2017, the acquisitions of S-REITs and their sponsors amounted to cS$6.4bn. Earnings contribution from these purchases should largely underpin our FY18 S-REITs DPU growth projection of 2.2%.
  • We anticipate S-REITS to remain in an acquisitive mode throughout 2018, in particular for S-REITs with strong sponsor development pipelines. While no timeline has been confirmed, we believe REITs such as Frasers Centrepoint Trust (FCT), Frasers Logistics & Industrial Trust (FLT), CapitaLand Mall Trust (CT), SPH REIT and Far East Hospitality Trust (FEHT) could potentially expand their property portfolios by acquiring these properties when they stabilize.

Singapore S-REITs Peer Comparison

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-12-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.380 Same 2.380
ADD Maintain ADD 1.200 Same 1.200
HOLD Maintain HOLD 0.690 Same 0.690