Singapore REITs - OCBC Investment 2018-03-06: Stick With Quality Amid Market Volatilty

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Singapore REITs S-REITs Recommendations & Top Picks FRASERS LOGISTICS & IND TRUST BUOU.SI FRASERS CENTREPOINT TRUST J69U.SI MAPLETREE LOGISTICS TRUST M44U.SI

Singapore REITs - Stick With Quality Amid Market Volatilty

• Muted 4QCY17 DPU.
• Yield spreads still tight.
• Top picks: FLT, FCT and MLT.

4QCY17 performance was still soft 

• The recently concluded 4QCY17 earnings season offered little surprises, as all 24 S-REITs under our coverage delivered results which met our expectations. On average, DPU growth declined marginally by 1.4% on a YoY basis, compared to -0.2% recorded in 3QCY17. 
• From a sub-sector perspective, the hospitality sector fared the worst (-6.8% y-o-y), while there was no clear strong-performing sub-sector, with retail delivering slightly positive growth of 0.4%. 
• Although Keppel DC REIT’s DPU jumped 33.6% y-o-y, adjusted growth would instead have increased 4.8% if we exclude the preferential offering exercise in 4Q16.
• In terms of rating changes, we downgraded 6 stocks during this earnings season on valuation grounds. This included CDL Hospitality Trusts (subsequently upgraded back to ‘HOLD’ after correction), Frasers Commercial Trust, Keppel DC REIT, Lippo Malls Indonesia Retail Trust, SPH REIT and Suntec REIT.

Retail sector: Improvement in consumer sentiment coupled with positive surprise from Budget 2018 

• Retail rents remained soft during 4Q17, as the overall URA retail rental index slipped 0.5% q-o-q, a larger magnitude as compared to the 0.2% decline registered in 3Q17. On a full-year basis, retail rents based on URA data fell 4.7% in 2017. However, this was less severe than the 8.3% dip suffered in 2016. 
• Separately, according to CBRE statistics, average prime retail rents remained unchanged q-o-q across all submarkets (Orchard Road, Suburban, City Hall/Marina Centre and Other City/City Fringe) in 4Q17.
• Notwithstanding this lacklustre rental trend, we believe consumer confidence is on the mend. According to the MasterCard Index of Consumer Confidence for Singapore, which is based on a random survey of households, the score came in at 54.63 for 4Q17, an improvement compared to 2Q17 (45.41) and 4Q16 (29.99). This also corroborates with the recent takeaways from the analyst briefings of retail REITs. 
• For the REITs which have disclosed their tenants’ sales figures, only Starhill Global REIT saw a y-o-y decline, but this was largely due to the renovation of its food court at Wisma Atria.
• The recent Budget 2018 saw Finance Minister Mr. Heng Swee Keat announce a one-off SG Bonus, whereby all Singaporeans aged 21 and above would be given either S$100, S$200 or S$300 depending on their income. This amounts to ~S$700m and would likely translate into some forms of increased retail spending. Although the government also hiked the GST from 7% to 9%, this would only be implemented sometime within the period of 2021 to 2025, versus initial market expectations prior to the Budget speech of a near-term implementation.

Office sector: Rentals to continue gaining traction 

• In-line with our earlier expectations of continued traction in office rental growth, we note that core CBD office rents grew 3.3% q-o-q to S$9.40 psf/month in 4Q17, according to CBRE’s data. This was the second consecutive quarter of growth, following 3Q17’s 1.7% sequential growth to S$9.10 psf/month. 
• The vacancy rate in the core CBD area also dipped 1.3 ppt q-o-q to 6.2% from 7.5%. This was underpinned by strong net absorption of 783.6k sq ft of office space in 4Q17, thus culminating in a full-year net absorption figure of 2.07m sq ft.
• Based on property consultants’ reports and our conversations with office REITs, we conclude that pre-commitment levels have shown improvement in both existing and pipeline projects. We believe that industry dynamics are slowly but surely shifting from a tenant’s market to a landlord’s market, particularly for the assets located in prime locations and fitted with high specifications. 
• Frasers Property Limited announced in mid-Jan this year that its Frasers Tower had achieved strong lease pre-commitments of over 70% for its 38-storey office tower, while close to half of its retail podium has also been successfully leased. Microsoft Singapore counts as one of its anchor tenants.
• Office supply in 2018 is expected to be approximately half that of 2017. Frasers Tower and 18 Robinson are the only two notable pipeline projects that are located in the Central Area with expected completion this year.
• On average, c.695,250 sq ft of new supply is projected to be added from 2018-2021 per annum, which is manageable, in our view, supported by healthier macroeconomic fundamentals.

Industrial sector: Rents could bottom out earlier than our previous expectations 

• According to data from JTC, the rental index for all industrial space inched down only 0.1% q-o-q in 4Q17. Although this marked the eleventh consecutive quarter of decline, the magnitude was smaller than the preceding quarters. 
• Business parks continued to dominate the positive headlines, as rents improved by 2.0% q-o-q (3Q17: +0.3% q-o-q) and this was also the third straight month of increase. Industrial REITs with relatively significant exposure to business parks are Ascendas REIT, Mapletree Industrial Trust and Soilbuild REIT. Based on our channel checks, we believe industrial rents could bottom-out in early 2H18, versus our earlier expectations that this would only happen at the end of the year.
• In terms of supply, an estimated 1.6m sqm of industrial space is expected to come to the market in 2018, representing ~3% of current stock, according to JTC. To put things in perspective, over the past three years, the average annual demand and supply were 1.3m sqm and 1.8m sqm, respectively.

Hospitality sector: Better demand and supply balance ahead 

• Singapore international visitor arrivals and visitor days grew 6.2% and 4.6% y-o-y to 17.4m and 58.8m in 2017, respectively. Meanwhile, 9M17 tourism receipts were up 5% y-o-y, with the increase largely contributed by Shopping (S$4.7b, +9% y-o-y), Sightseeing, Entertainment & Gaming (S$4.2b, +6% y-o-y) and Other TR Components (S$4.8b, +9% y-o-y). In comparison, Accommodation spend was up 2% y-o-y at S$4.6b.
• Industry-wide RevPARs fell 1.5% y-o-y to S$182.5 in 2017, driven by competitive pressures from a higher supply injection. However, this decline was not as steep as the 4.6% y-o-y dip seen in 2016. 
• According to statistics from Singapore Tourism Board, the Economy Hotel segment was the best performer, registering y-o-y growth of 8.4%. Upscale and Mid-Tier Hotels had flat growth (both +0.1% y-o-y), while the Luxury segment fared the worst with a 2.8% y-o-y decline.
• Looking ahead, we expect corporate demand to improve in terms of volume, although room rates will likely still face some pressures. Supply-wise, the increase in inventory is expected to be limited. Market watcher Horwath HTL has estimated new room supply to increase 1.2% in 2018, 2.5% in 2019 and 0.6% in 2020.

Valuations not yet attractive despite YTD correction 

• The FTSE ST REIT Index (FSTREI) has declined 5.9% YTD, versus the STI’s YTD 1.1% increase. Including dividends, total returns for the FSTREI and STI came in at -4.7% and 1.2% YTD, respectively. 
• Despite the S-REITs' share price correction, we do not find sector valuations attractive. The FSTREI is currently trading at a forward yield spread of 369 bps against the Singapore Government 10-year bond yield. This comes in at ~1.2 standard deviations below the 5-year average of 412 bps. 
• Furthermore, during new Fed Chairman Jerome Powell’s first Congressional testimony, although he highlighted that the Fed would stick with gradual interest rate increases, the market seems to have factored in higher odds of four rate hikes this year given Powell’s personal assessment that the economy is more optimistic than in Dec. 
• Amid our cautious view on the S-REITs sector, we narrow our top pick recommendations to 3 quality names to accumulate following the market pullback: 
  • Frasers Logistics & Industrial Trust [Rating: BUY; Fair Value: S$1.25]; 
  • Frasers Centrepoint Trust [Rating: BUY; Fair Value: S$2.49]; and 
  • Mapletree Logistics Trust [Rating: BUY; Fair Value: S$1.48]. 
• Maintain NEUTRAL on the broader S-REITs sector.

OIR's S-REITs coverage and rating
SREIT		Price	Fair Value	Rating
Ascendas REIT	SGD	2.58	2.69	HOLD
Ascott Residence Trust	SGD	1.160	1.16	HOLD
Cache Logistics Trust	SGD	0.83	0.85	HOLD
CapitaLand Commercial Trust	SGD	1.70	1.84	HOLD
CapitaLand Mall Trust	SGD	1.98	2.26	BUY
CapitaLand Retail China Trust	SGD	1.57	1.66	HOLD
CDL Hospitality Trusts	SGD	1.65	1.600	HOLD
Far East Hospitality Trust	SGD	0.705	0.75	BUY
First REIT	SGD	1.36	1.48	BUY
Frasers Centrepoint Trust	SGD	2.18	2.49	BUY
Frasers Commercial Trust	SGD	1.420	1.51	HOLD
Frasers Logistics & Ind Trust	SGD	1.07	1.25	BUY
Keppel DC REIT	SGD	1.380	1.51	HOLD
Lippo Malls Indo Retail Trust	SGD	0.380	0.405	HOLD
Mapletree Greater China Com	SGD	1.210	1.39	BUY
Mapletree Industrial Trust	SGD	1.930	2.06	HOLD
Mapletree Logistics Trust	SGD	1.200	1.48	BUY
OUE Commercial REIT	SGD	0.71	0.69	HOLD
OUE Hospitality Trust	SGD	0.845	0.84	HOLD
Soilbuild REIT	SGD	0.655	0.68	HOLD
SPH REIT	SGD	0.990	1.08	HOLD
Starhill Global REIT	SGD	0.72	0.77	HOLD
Suntec REIT	SGD	1.91	1.81	SELL
Viva Industrial Trust	SGD	0.865	0.93	HOLD

Wong Teck Ching Andy CFA OCBC Investment | Deborah Ong OCBC Investment | Joseph Ng OCBC Investment | http://www.iocbc.com/ 2018-03-06

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.250 Same 1.250

BUY Maintain BUY 2.490 Same 2.490

BUY Maintain BUY 1.480 Same 1.480