REITs – Singapore - UOB Kay Hian 2019-01-28: Central Bankers Tilting Toward More Dovishness; Buy REITs

REITs – Singapore - UOB Kay Hian Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) CAPITALAND COMMERCIAL TRUST (SGX:C61U) CDL HOSPITALITY TRUSTS (SGX:J85) KEPPEL REIT (SGX:K71U) PARKWAYLIFE REIT (SGX:C2PU)

REITs – Singapore - Central Bankers Tilting Toward More Dovishness; Buy REITs

  • Fed officials are close to deciding on an earlier end to quantitative tightening. More information could be released after the FOMC meeting on 29-30 January.
  • ECB policymakers are unanimous in acknowledging that growth momentum has weakened. There are speculations that the ECB will launch a third round of TLTRO.
  • Maintain OVERWEIGHT. REITs are key beneficiaries.
  • Top BUYs are Ascendas REIT, CapitaLand Commercial Trust, CDL Hospitality Trusts, Keppel REIT and ParkwayLife REIT.



WHAT’S NEW


Fed contemplating an earlier end to balance sheet reduction.

  • According to The Wall Street Journal, Fed officials are close to deciding on maintaining a larger portfolio of securities, ie ending balance sheet reduction earlier. The Fed could also switch towards holding more short-term treasury bills. Fed officials are still ironing out the details on how to communicate the change in strategy to the public. This is a dovish u-turn compared to Fed Chairman Jerome Powell’s previous comments that balance sheet reduction is on “autopilot” and the Fed’s balance sheet would be “substantially smaller”.
  • The Fed started to taper the size of its balance sheet in Oct 17 by not reinvesting proceeds from securities that mature. The process is informally known as quantitative tightening (QT). We had expected QT to be conducted in 2018 (year1), 2019 (year2) and 2020 (year3).
  • We also expect QT to end on Dec 20 when the Fed’s balance sheet reduces to US$3t. An earlier end before Dec 20 would be bullish for equities. More information could be made available after the FOMC meeting this week on 29-30 January.

ECB signalling readiness to act if slowdown persists.

  • European Central Bank (ECB) President Mario Draghi says policymakers are unanimous in acknowledging that growth momentum has weakened after the Governing Council met on 24 Jan 19. The balance of risk for growth is said to have shifted towards the downside due to persistent uncertainties related to global trade conflict, US-China trade conflict and Brexit. Economic indicators released recently, such as the PMI, have also shown a weakening trend.
  • The ECB kept interest rates on its main refinancing operations, marginal lending facility and deposit facility unchanged at 0.00%, 0.25% and -0.40% respectively. Nevertheless, it has signalled readiness to act if growth in Europe continues to disappoint. The ECB ended the asset purchase programme (QE) in Dec 18. There are speculations that the ECB will launch a third round of targeted long-term refinancing operations (TLTRO) on conditions that banks step up lending to companies and households.


ACTION


Maintain OVERWEIGHT.


Ascendas REIT (Rating: BUY / Target Price: S$3.01)

  • ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) benefits from the positive spillover from tight occupancies for offices within the CBD as business and science parks accounted for 33% of total property value. We expect Ascendas REIT to scale up overseas with acquisitions in Australia and the UK.

CapitaLand Commercial Trust (Rating: BUY / Target Price: S$2.16)

  • Limited upcoming supply of office space within the core CBD augurs well for continuation of uptrend in office rents. We expect positive rental reversion for AST2 in 1H19 and CapitaGreen in 2H19. CAPITALAND COMMERCIAL TRUST (SGX:C61U) will pursue investments in Singapore and Germany.

CDL Hospitality Trust (Rating: BUY / Target Price: S$1.83)

  • Visitor arrivals to Singapore grew 6.6% y-o-y in 11M18. The benign supply growth going forward is expected to support a recovery in RevPar. CDL HOSPITALITY TRUSTS (SGX:J85) will benefit from strong visitor arrivals and recovery in RevPar in Singapore, which accounted for 59.4% of NPI in 9M18.

Keppel REIT (Rating: BUY / Target Price: S$1.35)

  • Limited upcoming supply of office space within the core CBD augurs well for continuation of uptrend in office rents for Singapore. KEPPEL REIT (SGX:K71U)'s development of 311 Spencer Street in Melbourne is progressing smoothly. The 30-year lease to the Victoria Police will commence when the building is completed in 1H20.

Parkway Life REIT (Rating: BUY / Target Price: S$3.15)

  • PARKWAYLIFE REIT (SGX:C2PU) is one of the most defensive REITs with WALE of 7.3 years. Its portfolio has favourable rental lease structures with 61% pegged to CPI-linked revision. ParkwayLife REIT benefits from aging populations in Singapore and Japan, which accounted for 59.9% and 39.6% of its revenue in 9M18.


SECTOR CATALYSTS

  • Dovish disposition at both the Fed and the ECB rekindles interest to invest in REITs.
  • Limited new supply for office, hotel and logistics segments in 2019 and 2020.


ASSUMPTION CHANGES

  • Our earnings forecast are unchanged.


RISKS

  • Uncertainties from the US-China trade conflict.





Peihao LOKE UOB Kay Hian Research | Andrew CHOW CFA UOB Kay Hian | https://research.uobkayhian.com/ 2019-01-28
SGX Stock Analyst Report BUY MAINTAIN BUY 3.010 SAME 3.010
BUY MAINTAIN BUY 2.160 SAME 2.160
BUY MAINTAIN BUY 1.830 SAME 1.830
BUY MAINTAIN BUY 1.350 SAME 1.350
BUY MAINTAIN BUY 3.150 SAME 3.150



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