Property & REITs - CGS-CIMB Research 2019-05-21: OVERWEIGHT

Property & REITs - CGS-CIMB Research | SGinvestors.io UOL GROUP LIMITED (SGX:U14) CAPITALAND COMMERCIAL TRUST (SGX:C61U) SUNTEC REAL ESTATE INV TRUST (SGX:T82U) MAPLETREE COMMERCIAL TRUST (SGX:N2IU)

Property & REITs - OVERWEIGHT


Property - Positive catalysts to look out for


Decent take-up rates, stable prices.

  • Although 1Q19 sales were slower on an absolute volume basis, take-up rates i.e. sales over new launch units in the primary private residential market in 1Q continued to hold up at 74% sell-through, without significant price contraction. This will reduce the prospect of land bank provisioning in the near term, in our view.

Low interest rate regime supportive of cap rates.

  • Benign interest rate environment and active investment market is supportive of compressed cap rates, which is positive for investment properties’ values and underpins RNAV expansion.


Property - Negative catalysts to fear


Higher incoming supply.

  • Increasing volume of new launches for the rest of 2019 could lead to lower take-up rates for new launches and rapidly rising unsold inventory.


Property - Risk of earnings cuts in the next 2 quarters? NO

  • We see low probability of earnings cuts within our existing forecasts as we have baked in lower initial take-up rates into our numbers.
  • Downside risks could come if transaction volumes dip below our expectation of 9,000- 10,000 transactions this year, i.e. lower-than-expected sell-through rates.


Property - Stock preference: UOL the most preferred

  • We remain Overweight on the sector due to the attractive valuations, after the recent market retracement. The sector is trading at 47% discount to RNAV and at 0.65x P/BV, at 1 s.d. discount to 30-year mean. Given our expectation of relatively stable residential prices, we anticipate near-term stock price performances to be dictated by newsflow such as take-up rates of new launches.
  • Our top pick in the sector is UOL GROUP LIMITED (SGX:U14), with potential re-rating catalysts coming from its planned rollout of two new launches over the next 1-2 months.


REITS - Positive catalysts to look out for


Benign interest rate outlook.

  • Although valuations are on the upper end of historical ranges, the expectations for interest rates to remain low over the next 12 months should be supportive of REITs’ share price performance.

Office rental upcycle remains intact.

  • Office spot rents continued to inch up in 1Q19, although at a more modest pace. With low incoming supply this year, we think office rents should continue to trend upwards.

Stronger retail tenant sales.

  • Retail REITs reported generally stronger shopper traffic in 1QCY19 while tenant sales remained largely stable. Reported rental reversions were in the mildly positive territory.
  • Going forward, organic rental growth should be supplemented by contributions from new acquisitions and completion of AEIs to deliver overall DPU growth.


REITS - Negative catalysts to fear


Tenant default risk.

  • While the majority of Industrial REITs reported improvements in occupancies and positive rental reversions during the quarter due to the lessening supply outlook, some of their exposure to companies in financial difficulties raised concerns.
  • HYFLUX LTD (SGX:600) contributed 1.2% and 3.5% to the rental income of Ascendas REIT (SGX:A17U) and ESR-REIT (SGX:J91U), respectively. The logistics-focused REITs also were not spared as the troubled HK-listed logistics player CWT accounted for 9.1% and 20.6% of MAPLETREE LOGISTICS TRUST (SGX:M44U) and CACHE LOGISTICS TRUST (SGX:K2LU)’s rental income, respectively, in 1QCY19. Although both Hyflux and CWT are current with their rent payments and have paid security deposits to the REITs, we think a default could lead to a downward adjustment in earnings forecasts if the REITs fail to fully backfill the vacancies, especially for the logistics-focused REITs.

Cutback on travel amidst uncertain outlook.

  • The absence of biennial events and events related to Singapore’s ASEAN chairmanship led to disappointing 1QCY19 results and lowered forward growth expectations. Outlook uncertainties due to trade tensions could further hit the sector if companies put expansion plans and projects on hold, resulting in a cutback in corporate travel. The lower resultant occupancy could stifle RevPAR growth and negatively impact DPU.


REITS - Risk of earnings cuts in the next 2 quarters? YES

  • Hospitality REITs delivered slightly negative RevPar growth in 1Q19. At the same time, management guided for a more modest 1-3% industry RevPar improvement for the whole of 2019 vs. our current projection of 3-5%.
  • Downside risk to our numbers exists if a significant pick up is not felt in 2Q.


REITS - Stock preference: MCT, CCT, SUN the most preferred

  • SREITs are trading at an average 4.9% yield and at 1.07x P/BV, midway between average and +1 s.d. of 15-year mean range. We expect SREIT valuations to remain compressed as investors continue to be risk-off, in the light of the current macro uncertainty due to trade tensions between the US and China.
  • While our sub-sector line-up ranked in order of preference is Office REITs as our most preferred followed by, Hospitality REITs, Retail REITs and Industrial REITs, we think investors would remain stock selective, with an inclination for liquidity and stock-specific catalysts.
  • Our top picks are MAPLETREE COMMERCIAL TRUST (SGX:N2IU) with catalysts coming from potential acquisition of Mapletree Business City P2, CAPITALAND COMMERCIAL TRUST (SGX:C61U) for its better leverage to the rising rental market via its lease renewals, and SUNTEC REIT (SGX:T82U) for its office exposure and new acquisitions.


See also






LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-21
SGX Stock Analyst Report ADD MAINTAIN ADD 8.450 SAME 8.450
ADD MAINTAIN ADD 2.030 SAME 2.030
ADD MAINTAIN ADD 2.060 SAME 2.060
ADD MAINTAIN ADD 2.030 SAME 2.030



Advertisement



MOST TALKED ABOUT STOCKS / REITS OF THE WEEK



loading.......



ANALYSTS SAY


loading.......