Singapore REITs - DBS Research 2018-02-20: Take The Leap Of Faith


Singapore REITs - Take The Leap Of Faith

  • Correction on interest rate fears largely done; stronger property fundamentals.
  • Attractive valuations with yield spreads and P/Bk now close to historical averages ahead of multi-year upturn.
  • Office and hotels remain our preferred sectors.
  • S-REIT Top picks – AREIT, CCT, MLT, Suntec REIT, CDREIT, FCT and FCOT.

It's different this time. 

  • The spike in the 10-year bond and fears over inflation caused the S-REIT index to drop by c.7% over the past week and we believe that the recent sell-off is largely done.
  • While the sharp correction brings back painful memories of the close to 22% drop in S-REIT prices back in 2013, we believe that this time, it's different. This is mainly coming on the back of stronger property fundamentals for most sub-sectors (office, hotels, industrials) supporting higher rentals/RevPAR, driving higher distribution growth rate. 
  • The increased income visibility and upside to earnings will, in our view, translate into tighter yield spreads going forward. Moreover, the quantum of interest rate increase (c.40-bp increase in 10-year bond till 2019) is much lower than the 90-bp increase we saw from the lows back in 2013.

Buy into firmer fundamentals. 

  • Given our expectations of a return growth on the back of better economic growth and easing supply pressures, as discussed in our 2018 outlook report, we believe the normalised yield spread (yield less normalised Singapore 10-year bond yield of 2.7%) can compress from 3.3% currently to c.3%. 
  • Post the correction, spot yield spreads and P/Bk of 3.7% and 1.07x which are close to historical mean of 3.8% and 1.04x, are attractive as in a multi-year upcycle the P/Bk can increase up to +1SD of 1.24x which typically coincides with an increase in interest rates. We believe once investors refocus on the improving property fundamentals, a re-rating will occur. Thus, the current weakness is a buying opportunity.

Selected Office, hotels and industrial REITs to leverage on upswing. 

  • With the outlook for office rents and hotel room rates remaining bright as confirmed by recent guidance post the recent results season, we remain overweight on the office REITs and hospitality REITs with our top office picks being CCT (Target Price S$2.10), Suntec REIT (Target Price S$2.30) and FCOT (Target Price S$1.71). 
  • Within the hotel space, we like CDREIT (Target Price S$2.00) and FHT (Target Price S$0.89). We also advocate investors being overweight on AREIT (Target Price S$2.85) and MLT (Target Price S$1.45) as they are consistent performers that are also leveraged to the cyclical upturn. 
  • Furthermore, we like FCT (Target Price S$2.48) for its strong DPU growth.

Heading into firmer fundamentals 

  • At the end of 2017, we believed that with the return of growth led by the office and hospitality sectors due to a recovery in spot office rents and hotel room rates, yield spreads would tighten to c.3% using a normalised 10-year bond yield of 2.5-2.6%. Due to the stronger-than-expected GDP growth numbers, normalised yield spreads for the S-REITs did tighten towards 3.0- 3.1% in early January (3.4% spot yield spread using spot 10- year bond of 2.1%). 
  • Following the recent spike in both the US and Singapore 10-year bond yield to c.2.9% and c.2.3% respectively on fears over the return of inflation and the US Federal Reserve increasing interests rates at a faster pace, investors took the opportunity to lock in profits with the normalised yield spread increasing to 3.3% (using our DBS economists' revised Singapore 10-year bond yield of 2.7% by year-end) and the spot yield spread (using spot Singapore 10- year bond yield of 2.3%) blowing out to 3.7% which is close to the historical average yield spread of 3.8%.
  • However, with no major changes in the positive outlook for various property sub-segments in Singapore due to a more buoyant economic environment and easing supply pressures, resulting in the return and acceleration of DPU growth, we believe the prospects for tightening of yield spreads towards a normalised c.3% by year-end remains intact. In addition, our DBS economists remain of the view that the US Federal Reserve should remain measured with its rate hikes and have maintained their assumption of three rate hikes which is in line with consensus expectations.

Share prices for S-REITs are close to near-term lows.

  • Based on our analysis, the current correction draws similar parallels to the taper tantrums in 2013, which resulted in the SREIT index falling 21.5% from peak to through. In 2013, the market shifted from a view that interest rates would remain low forever to prospects of interest rates rising. However, the outlook for Singapore property was uncertain, unlike now where property fundamentals are improving. However, back in 2013, prices for S-REITs eventually rebounded as interest rates remained benign.
  • In contrast, today the market is jittery over faster-than-expected growth causing a return of inflation, resulting in the US Federal Reserve being more hawkish. However, we should note that if the interest rates go higher, hitting our DBS economists’ projections of 3% and 2.7% for the US and Singapore 10-year bond yield by year-end, the percentage increase in interest rates and impact would be less as we are now starting at a higher base compared to the taper tantrums in 2013. 
  • In 2013, the US 10-year bond yield stood around 1.92% at the start of the SREIT market correction before ending at 2.88% when the S-REIT index hit its lows. This is a c.50% increase in the long bond yield as compared to a potential c.20% increase from 2.56% in early January 2018 to 3% by year-end.
  • Looking ahead, we see upside in distributions, driven by firmer underlying property fundamentals. Unlike 2013, the forward picture in 2018-2019 for most property sectors remain positive, driven by stronger economic activity and a supply squeeze (especially in office, hotel, warehouse and business park sectors), will mean a multi-year recovery in rentals.
  • Therefore, based on the fact that the expected percentage increase in the 10-year bond yield is less than what occurred in 2013 and the property market is expected to improve from here, any correction in S-REITs should be less than the falls recorded during the taper tantrum in 2013. While it is difficult to judge the absolute peak-to-trough correction this time round, based on the two factors described, a peak-to-trough fall could be half that of the correction in 2013 which would translate into a 10-12% fall. Thus far, the S-REIT index has fallen 7.6% or 8.5% on the intra day low, meaning we may still see 3-5% downside from current levels. 
  • Nevertheless, we believe we may have already seen the lows for some REITs as they have fallen by more than 15% based on their recent intraday lows. In addition, during the 2013 taper tantrums, it took six to seven months for the S-REIT Index to bottom out. Given the positive property fundamentals the S-REIT index may take three to four months to form a base as investors who were shocked by the sudden spike in interest rates regain confidence over the positive property outlook in Singapore and how rising rents can help offset the impact of rising interest rates.

Downside scenario analysis 

  • While we are confident that we already approaching the lows, we have also conducted a bear case scenario analysis to gauge which stock have already been oversold. Our analysis involves applying the average yield spread during the 2013 taper tantrum to our economist’s forecast Singapore 10-year bond yield of 2.7% to derive a target implied yield and target price.
  • Under this analysis, FCOT, CRCT, CMT and Cache and SBREIT, have largely priced in the current “tantrums” with the implied target prices at or above the current shares price. Our analysis also shows there remains downside risk to other S-REITs.
  • However, we do note in a multi-year upturn which we expect over the coming few years, yield spreads typically contract while the benchmark 10-year bond yield increases, with the net impact, a lower headline yield and higher share price. Thus, while there is a potential decline in share prices for several SREITs based on our bear case analysis, in our view using the average yield spread during the 2013 taper tantrum’s does not reflect the different economic environment nor the stage of the property cycle we are currently in. The more accurate yield spread we believe investors should use is closer to what was achieved during the up-cycle in 2006-2007, which provides for upside potential to the current share prices of various S-REITs.

BUY on weakness 

  • Given our house view that the increase in interest rates will be measured and inflation will remain under control, we believe the current share price weakness is an opportunity for investors to accumulate as the return of growth and investors refocusing on property fundamentals rather than macro should result in a compression of yields by year-end.
  • In addition, post the recent correction, S-REITs' valuations have now become more attractive considering we are potentially at the start of a multi-year recovery in various sub-property markets. In such an environment, yields are above and beyond the historical average, with P/Bk multiples closer to 1.15-1.24x (+0.5 to +1.0 SD). 
  • Currently, the S-REIT forward yield is at 6% which is slightly beyond the average historical mean yield of 6.2%. On a P/Bk basis, the S-REIT market is at 1.07x which is also a touch above the average historical P/Bk of 1.04x.

In terms of sector preferences, we continue to like the office and hospitality sectors. 

  • We believe the office sector will provide the best leverage to the cyclical upturn in the Singapore economy, while the hospitality sector will offer the fastest growing DPU
  • Our third preference would be the industrial sector mainly due to the headwinds from negative rental reversions impacting the smaller industrial REITs
  • For the retail sector, there are significant concerns over supply pressures and the threat from ecommerce, but we believe a large proportion of these concerns have already been priced in. However, we believe there is limited re-rating catalysts to propel investors to actively overweight the sector especially with potential headwinds from the increase in the GST, thus capping the near term share price performance. 
  • Furthermore, should we see a rebound in interest on S-REITs, we believe capital would likely flow first to the cyclical sectors with the retail sector being a funding source. We would advocate investors to relook the retail sector in 2H18 as a stronger Singapore economy may translate into stronger retail sales and boost sentiment in the sector.

Top picks 

  • Given our preference for the office, industrial and hospitality sectors, in the large-cap space we prefer CCT and Suntec REIT. For the mid-cap REITs, we like CDREIT, FCOT and FHT.
  • We also like the large-cap industrial REITs, AREIT and MLT for their steady performance with upside coming from potential acquisitions.
  • For more details on our top picks, see the table below.

Large-cap S-REITs Top Picks.

REIT Current
AREIT 2.59 2.85 17% 6.3% 1.27 Steady consistent performer with scale. Overhang from lack of CEO now removed.
CCT 1.72 2.10 27% 5.1% 0.97 Leveraged to the multi-year recovery in the Singapore office market and trades at 1.0x P/Bk but during an upcycle CCT can trade up to 1.2x P/Bk.
MLT 1.23 1.45 24% 6.3% 1.16 Positive outlook for MLT’s key markets of Singapore, Japan, HK and Singapore with near-term DPU boosted by recent acquisitions.
Suntec 1.90 2.30 26% 5.3% 0.92 Play on the turnaround of Suntec Mall and recovery on the Singapore office market, with potential upside from a takeover.
Source: Bloomberg Finance L.P., DBS Bank.

Mid-cap S-REITs Top Picks.

REIT Current
CDREIT 1.66 2.00 27% 6.1% 1.09 Leveraged to the multi-year recovery in the Singapore hospitality market.
FCOT (new addition) 1.39 1.71 30% 7.2% 0.92 Recent expansion into UK to kick-start FCOT’s inorganic growth strategy and allay concerns that the REIT is ex-growth. This should also reduce FCOT’s yield spread to the other office REITs from c.2% closer to the average spread of c.0.8%.
FHT 0.78 0.89 21% 6.8% 0.97 Leveraged to the upturn in the Singapore, Melbourne and Sydney hospitality markets with higher-than-average yields compared to other hospitality REITs.
Source: Bloomberg Finance L.P., DBS Bank.

Active start to the year 

  • Year to date, beyond the volatility in share prices, it has been an active start to the year. Two REITs, ART and FCOT have raised S$100m in equity each to fund acquisitions, while the long discussed consolidation in the smaller industrial REITs has commenced with ESR and VIT planning a merger.

Recent reporting season summary 

  • Over the recent reporting season, results were generally in line with expectations and DPU performance muted or down y-o-y as expected as the various property markets are transitioning from an oversupply situation to a bottoming or recovery phase.
  • Detailed below are a summary of the sector.


  • Over the quarter, the stronger retail assets continued to perform, with MCT’s key asset Vivocity maintaining its steady performance. Meanwhile, the market responded to FCT’s strong DPU performance and news that rents post the AEI at NorthPoint City were 9% higher. Industry stalwart CMT was flat over the month as negative rental reversions and cautious commentary weighed on the stock. 
  • Despite the threat of ecommerce and the supply overhang in Singapore, there were signs that retail sales could be bottoming with the November 2017 retail sales index (excluding motors) jumping 4.7% y-o-y.


  • The larger industrial REITs reported decent numbers with MINT and MLT benefitting from acquisitions made last year with 3QFY18 DPU up 2% y-o-y. AREIT also delivered a steady performance with DPU marginally down 1%. 
  • Meanwhile, the smaller industrial REITs continued to report weak DPU performance (down -7% to – 14%), but the proposed merger between ESR and VIT was the major news. This spurred further talk of further consolidation among the smaller REITs with AIMS, Cache, Sabana and Soilbuild being potential takeover targets.


  • While spot rents have recovered from their lows in 1H17, hitting S$9.40 psf at end-December, office REITs reported negative rentals as expiring rents were higher than signing rents. This, combined with prior quarters of rental reversions, resulted in the office REITs reporting y-o-y falls in DPU (down 3-13% y-o-y).
  • However, various landlords reported increased leasing enquiries and tenants being more eager to renew their leases on anticipation of spot rents climbing higher. This potentially could provide a tailwind towards the end of 2018 and early 2019, with signing/spot rents increasing to a level when negative rental reversions stop and/or even office REITs reporting positive rental reversions.


  • While 4Q17 DPU for the hospitality REITs ended on a soft note being down y-o-y, there were positive signs that a turnaround of the sector is in sight. Hoteliers showed significant pricing discipline over the quarter despite the opening of seven new hotels. Revenue per available room (RevPAR) for the December quarterly was either relatively stable or up y-o-y. 
  • In addition, the hospitality REITs generally provide a more upbeat tone for 2018, with both CDREIT and OUEHT indicating that RevPAR could increase by 2-5% y-o-y in 2018.

S-REIT Quarterly (201709 to 201712) Performance

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-02-20
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.850 Same 2.850
BUY Maintain BUY 2.100 Same 2.100
BUY Maintain BUY 1.450 Same 1.450
BUY Maintain BUY 2.300 Same 2.300
BUY Maintain BUY 2.480 Same 2.480
BUY Maintain BUY 1.710 Same 1.710
BUY Maintain BUY 0.760 Same 0.760
BUY Maintain BUY 2.000 Same 2.000