Singapore REITS Strategy 2018 - RHB Invest 2018-01-05: Stay Selective, Focus Shifts To Growth


REITS Strategy 2018 - Stay Selective, Focus Shifts To Growth

  • We expect selective REITs to continue to remain in favour in 2018 after a stellar performance in 2017 (+21%). While valuations are slightly above mean and rate hike threat persists, the strong economic pick-up should boost underlying demand and continue to support REITs. 
  • We believe investor attention would now turn to REITs that are likely to benefit from the current economic growth cycle and deliver DPU growth. 
    • Industrial and hospitality sectors are expected to be direct beneficiaries of the economic pick-up and would be further aided by supply tapering. 
    • While the office sector outlook is positive, stocks have priced in most of the upside. 
    • Retail is our least preferred sector, as weak demand and supply challenges continue to weigh. 
  • We remain OVERWEIGHT on the sector.

Focus on growth drivers as supply threats fade away. 

  • Currently, S-REITs are trading at a 350bp premium to Monetary Authority of Singapore (MAS) 10-year bond yields vs the 10-year average mean spread of 410bps (excluding Global Financial Crisis peaks). Despite the strong outperformance in 2017, the sector still offers among the highest absolute yields of the REITs sector globally. 
  • While yield spreads have compressed below mean levels with a threat of faster rate hikes, this is however mitigated by a strong pick-up in economy activity, which should filter into the underlying demand for REITs. Under this context, we believe investor attention would be focused on REITs that are likely to benefit from the economic pick-up and deliver growth. 
  • Additionally, REITs that have made accretive acquisitions are expected to deliver inorganic growth from the uptick in demand. Thus, we expect S-REITs, which are well positioned to capture this uptrend along with respective strong balance sheets, to outperform their peers. 
  • Overall, we expect S-REITs (stocks under coverage) to deliver a DPU growth of 2% for 2018 with the hospitality (4%YoY DPU growth) and industrial (3% YoY DPU growth) sectors being key contributors.

Hospitality – On the cusp of multi-year growth. 

  • After peaking in 2012, Singapore (SG) hotel RevPAR has been on an gradual declining trend and is down ~12% from its peak. While occupancy has remained relatively steady through the years, room rates have taken a hit due to the increased competition from new hotels. With supply threats diminishing and demand expected to pick up, we expect hoteliers to regain some of the pricing power. 
  • Overall, we expect RevPAR to increase by 3-7% in 2018, with the following factors being the key drivers: 
    1. Visitor arrivals to increase by 4-7% in 2018;
    2. Corporate demand to see some pick-up along with global growth; 
    3. More meetings, incentives, conventions, and events (MICE) activities in 2018;
    4. Reduction in new hotel room supply.
  • Our Top Pick for hospitality REITs is OUE Hospitality Trusts (OUEHT).

Industrial – Strong manufacturing data to aid in demand growth. 

  • Among industrial subsectors, we prefer REITs with exposure to the business parks and hi-tech industrial segment. Demand supply dynamics for business parks remain favourable, with limited (~400,000 sqf) supply (10-year average :1.4m sqf) coming on stream in 2018. 
  • Overall, we expect rents to increase by 3-7% in 2018. For the factory and warehouse logistics segment, we expect rents to stay flattish in 2018, with outlook brightening in 2H18. 
  • Ascendas REIT (AREIT) (AREIT SP, BUY, TP: SGD2.90) remains our Top Pick, due to its well-diversified industrial property exposure and efficient capital recycling strategy. 
  • Cache Logistics Trust (Cache) (CACHE SP, NEUTRAL, TP: SGD0.84) is expected to be a late-cycle play on the turnaround in logistics sector, as supply headwinds are likely to abate in 2H18.

Office – Favourable dynamics but positives priced in. 

  • We expect Grade-A office rents to increase by 5-10% in 2018 as demand picks up and supply slows down. Office supply for 2018 is expected to slow down to 1.8m sqf in 2018 from 3m sqf in 2017. Grade-A office rents for 3Q17 have already shown signs of improvement, with rents increasing 1.7% QoQ after declining 21% since the start of 2015.
  • Despite the positive sector outlook, we believe office REITs under our coverage are expected to see continued negative rent reversions in 2018 as the expiring rents are still 10-20% above current market rents. YTD-December, office REITs are up 22%, making it the best performing sub-sector among REITs. Thus, we believe most of the positives have already been factored in the share price. 
  • We remain Neutral on this sub-sector and would recommend investors to wait for a pullback.

Retail – Outlook remains challenging. 

  • Despite the slight uptick in retail sales (excluding motor vehicles) in recent months, overall demand and sentiment on the sector continue to remain weak. 
  • Based on data from CBRE, c.1.8m sqf (3.8% of inventory) of retail supply is expected to come on stream in 2018 compared to the 10-year average net demand of 676,000 sqf. The higher supply amid relatively weak retail demand should continue to exert pressure on retail rents. Amidst the challenging environment, we expect only well- positioned defensive sub-urban malls to register decent performance. 
  • Overall, retail is our least preferred sub-sector among REITs. We would recommend Frasers Centrepoint Trust (FCT) (FCT SP, NEUTRAL, TP: SGD2.24), to investors looking for retail exposure due to the upside potential from recent asset enhancements, solid balance sheet and potential growth from acquisitions.

Overseas REITs – Manulife US REIT (MUST) – good proxy to the US economic growth. 

  • Among the overseas REITs listed in Singapore we like Manulife US REIT (MUST SP, BUY, TP: SGD0.98) for its pure-play office exposure to the rebounding US economy and office market. The impact of a rate hike also should be mitigated, as this would coincide with a pick-up in US office demand and potential strengthening of USD benefitting unit holders. 
  • While the recent amendments in US tax regulations have resulted in some changes to the existing tax efficient structure, we understand that the overall impact on unit holders distributions would be minimal.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-05
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.910 Same 0.910
BUY Maintain BUY 2.900 Same 2.900
NEUTRAL Maintain NEUTRAL 2.240 Same 2.240
NEUTRAL Maintain NEUTRAL 0.840 Same 0.840
BUY Maintain BUY 0.980 Same 0.980