Singapore REITs - Phillip Securities 2018-11-20: Monthly Tracker (November 2018)

Singapore REITs Monthly Tracker - Phillip Securities Research | SGinvestors.io CAPITALAND COMMERCIAL TRUST (SGX:C61U) KEPPEL DC REIT (SGX:AJBU)

Singapore REITs - Monthly Tracker (November 2018)

  • FTSE S-REIT total return declined 4.9% YTD. Weakness across all sub-sectors – save for hospitality over the past month – with Frasers Hospitality Trust being the top performer (+5.6% MTD) and Keppel-KBS US REIT being the worst performer (-17.0% MTD).
  • Sector yield spread of 273bps over the benchmark 10-year SGS (10YSGS) yield remains close to the -1 standard deviation (SD) level as at end-October.
  • 3m SOR continued to rise YTD, ending at 1.73% in October.
  • Remain NEUTRAL on S-REITs sector. Sub-sector preferences: Office and Hospitality.


S-REIT yield spread declined 51bps YTD in October.

  • The S-REIT yield spread remains close to the -1 standard deviation (SD) level as at end-October. The 10YRSGS yield currently stands at 2.51%.
  • Rising interest rates will be a headwind for S-REITs from a yield and interest expense perspective, but it does not necessarily lead to a bearish state as rental growth can be a mitigating tailwind.

3-month SOR continues to rise YTD.

  • 3-month SOR Hitting 1.73% at end-October, the 3-month SOR was the highest since Jan 2005.


  • Dismal results reported by the Singapore retail REITs, on the back of negative or flat rental reversions recorded in 3QCY18. Tenant sales and footfall still weak y-o-y, which could continue to place pressure on occupancy cost and thus, reversions.
  • CapitaLand Mall Trust (CMT) had completed the acquisition of the remaining 70% interest in Westgate on Nov 1, which the REIT had held a successful S$278mn private placement exercise for. Assuming CMT’s current funding cost of 3.2%, this funding structure of c.65% debt would be accretive to FY18e and FY19e DPU.
  • Retail sales ticked up 1.8% y-o-y in September, with Fashion (+3.0% y-o-y) and Watches and Jewellery (+7.4% y-o-y) being some of the top contributors. The F&B index was up 1.3% y-o-y in September.


  • Uptick in both central and office rental indices for 3QCY18, helped by y-o-y improvement in occupancy for both Central and Fringe office space. Above 98% occupancy for the office REITs, well above the average central office occupancy of 88.2%.
  • With average Grade A rental rates improving over the past five quarters, positive or higher reversions are expected to come about once they surpass expiring rents – which were typically signed c.3 years ago.
  • Frasers Tower had a reported 90% occupancy rate, and the only Grade A supply for the year will be from 16 Robinson.


  • Rental Index appears to be stabilising, as it declined -0.1% q-o-q to 90.9 and the decline each quarter this year has been getting smaller. 3QCY18 occupancy ticked up slightly y-o-y to 89.1% and 89.4% for factory space and warehouse space, respectively.
  • Rental reversions during the quarter were generally negative.
  • Demand-side looks fragile, as manufacturing and export data are moderating; and the threat of escalating trade tariffs is adding pressure to an already uncertain outlook.


  • Average RevPAR rose 4.48% y-o-y, to S$197, in September, both on higher occupancy and higher average room rates (ARR).
  • While higher occupancy rates were clocked in for the Singapore portfolio across the Hospitality REITs, RevPAR was down y-o-y for a few REITs owing to new market entrants in the area which placed pressure on the ARR.


Remain NEUTRAL on the S-REITs sector

  • While the S-REIT yield spread is currently near the -1SD level since the global financial crisis, strong rental growth should offset any adverse effects from rising interest rates. As such we have identified pockets of opportunities within each sub-sector that would exhibit these characteristics of healthy reversion rates and strong leasing activity.
  • We maintain NEUTRAL on the S-REITs sector on declining tenant sales in the Retail sub-sector and sluggish net absorption of Industrial space. A marked improvement in tenant sales would allow the retail S-REITs to improve occupancy levels at sustainable rental levels. However, tighter e-commerce competition and the oncoming retail supply glut would continue to weigh on retail rentals in the medium term.
  • While Industrial rents have been stabilising, occupancy still has some catching up to do in order to provide a meaningful catalyst for a sub-sector upgrade.

Top-down view (unchanged)

  • We like the Commercial and Hospitality sub-sectors due to tapering supply after the surge in supply in the prior two to three years.
  • We are cautious on the Retail sub-sector as retail sales and shopper footfall both leave much to be desired.

Tactical bottom-up view (unchanged)

  • REITs that can better weather through the rising interest rate environment would be those with:
    1. Low gearing;
    2. High-interest coverage;
    3. Long weighted average debt to maturity; and 
    4. A high proportion of debt on fixed interest rates
  • …such as CapitaLand Commercial Trust (ACCUMULATE, TP:S$1.90), Keppel DC REIT (ACCUMULATE, TP:S$1.45), Frasers Commercial Trust*, and Keppel-KBS US REIT*.
  • * Currently not under PSR coverage

Tara WONG Phillip Securities Research | https://www.stocksbnb.com/ 2018-11-20