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 - Budget 2019 Supportive Of S-REITs
- The extension of tax incentives for S-REITs and REIT ETFs will strengthen Singapore’s position as a REIT hub, attract listing of REITs and enhance trading liquidity. Tax exemption for S-REITs and REIT ETF distributions received by individuals would become permanent.
- Office REITs and Industrial REITs are not affected by the reduction in DRC. The impact on retail REITs and hospitality REITs is indirect and mild.
- Maintain OVERWEIGHT. Top BUYs are Ascendas REIT (SGX:A17U), CapitaLand Commercial Trust (SGX:C61U), CDL Hospitality Trusts (SGX:J85), Keppel REIT (SGX:K71U) and ParkwayLife REIT (SGX:C2PU).
WHAT’S NEW
Extension of incentives for S-REITs.
- S-REITs enjoy income tax concessions:
- S-REITs are granted tax transparency if they distribute at least 90% of taxable income to unitholders.
- S-REITs distributions received by individuals are tax exempted. A concessionary income tax rate of 10% applies to non-resident non-individual investors.
- Qualifying foreign-sourced income is tax exempted.
- These concessions, which were schedule to lapse after 31 Mar 20, have been extended by five years to 31 Dec 25. The sunset clause for tax exemption for S-REITs distribution received by individuals would be removed. MAS will provide more details in May 19.
Extension of incentives for REIT ETF.
- REIT ETF enjoys income tax concessions:
- Tax transparency for distributions received by S-REIT ETF from S-REITs.
- REIT ETF distributions received by individuals are tax exempted. A concessionary income tax rate of 10% applies to qualifying non-resident non-individual investors.
- These concessions, which were schedule to lapse after 31 Mar 20, have been extended by five years to 31 Dec 25. The sunset clause for tax exemption for REITs ETF distribution received by individuals would be removed.
Reducing dependency on foreign workers.
- The dependency ratio ceiling (DRC) for the services sector will be reduced from 40% to 38% effective 1 Jan 20 and further reduced to 35% on 1 Jan 21. The services sector S Pass DRC (mid-skilled foreign employees earning more than S$2,300 per month) will also be reduced from 15% to 13% at 1 Jan 20 and to 10% by 1 Jan 21.
ACTION
Enhances REIT hub status with extension of tax concessions.
- The extension of tax incentives for S-REITs and REIT ETF will strengthen Singapore’s position as a REIT hub, attract listing of REITs, and enhance trading liquidity.
- In particular, tax exemption for S-REITs and REIT ETF distributions received by individuals would become a permanent feature. Thus, S-REITs and REIT ETF have become ideal investments for personal savings and retirement planning.
Minimal impact from reduction in DRC.
- REITs are asset owners holding income-producing assets. Pure market forces of demand and supply determine office and industrial rents. For retailers and hoteliers, the restriction on foreign labour is an on-going struggle (no U-turn on economic restructuring) and further tightening of DRC should not be a surprise. They have invested in automation to improve productivity and reduce reliance on foreign labour.
- For retail REITs, only a small portion of rents is pegged to tenants’ sales. For CapitaLand Mall Trust (SGX:C38U), gross turnover rent is about 5% of its gross revenue. Also, CapitaLand Mall Trust’s average occupancy cost is healthy at 18.4% for 2018. The trend to attract “activity-based tenants”, such as activity parks, gymnasiums, cooking studios and enrichment classes, could shift the reliance to domestic labour.
Hospitality REITs cushioned despite high foreign-staff dependence.
- The hospitality industry has traditionally seen high foreign manpower dependence (as high as 40% of total staff). However, the flow-through impact is diluted by the REITs’ overseas exposure. For hospitality REITs under our coverage, Singapore-exposure varies from CDL Hospitality Trusts (57.6% of 4Q18 NPI), Frasers Hospitality Trust (SGX:ACV) (21% of 1QFY19 NPI) to Ascott Residence Trust (SGX:A68U) (11% of 4Q18 GP).
- The hotel industry has reduced the reliance on manpower since 2015. Headcount has contracted at a 4-year CAGR of 1.2% vs a 4-year hotel room CAGR of 4.1% in 2015-18. Thus, efficiency as measured by number of staff per hotel room has improved from 0.70 in 4Q11 to 0.52 in 3Q18.
- Hotel and serviced residence operators, depending on the type of rental agreement entered, may also shoulder much of the foreign-labour crunch. For properties on management agreements, the REIT is the master lessee for the hotel’s operations, and therefore bears the full P&L impact (ie including higher staff cost). This applies to Somerset Liang Court and Citadines Mount Sophia, which together contributed 4% of Ascott Residence Trust’s 4Q18 GP.
For properties on master leases,
- (which applies to all of CDL Hospitality Trusts’s and Frasers Hospitality Trust’s Singapore properties), much of the risk is borne by the operator. For instance, CDL Hospitality Trusts’s Singapore IPO portfolio will receive rental (20% GOR + 20% GOP) supported by a fixed rent floor of S$26.4m p.a.
Maintain OVERWEIGHT.
- REITs are key beneficiaries as interest rates peak in 2019. REITs are also defensive due to long weighted average lease expiry (WALE). In this respect, ParkwayLife REIT (7.3 years), CapitaLand Commercial Trust (6.0 years) and Keppel REIT (5.7 years) are the most defensive.
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 forecasts are unchanged.
RISKS
- Uncertainties from the US-China trade conflict.
Jonathan KOH CFA
UOB Kay Hian Research
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Peihao LOKE
UOB Kay Hian
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https://research.uobkayhian.com/
2019-02-20
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