Singapore REITs - DBS Research 2019-06-27: A Premium For Your Assurance

Singapore REITs - DBS Group Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) FRASERS CENTREPOINT TRUST (SGX:J69U) KEPPEL-KBS US REIT (SGX:CMOU) MAPLETREE NORTH ASIA COMM TR (SGX:RW0U) SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Singapore REITs - A Premium For Your Assurance




A more gradual climb from hereon.

  • Our bull call on S-REITS since the start of the year was a profitable trade. S-REITs have delivered a total return of c.20% YTD. See S-REITs Share Price Performance.
  • Most of the S-REITs are now trading at -1.0 or -1.5 SD yield spread ranging from 2% to 4%. Average S-REIT P/Bk of 1.17x and yield of 5.4% is approaching +1SD of 1.23x and -1SD yield of 4.8%.
  • Notwithstanding potential profit-taking along the way, the next leg up should be more modest and gradual. This should be driven by DPU growth as S-REITS benefit from tailwinds of an upturn in the Singapore property sector and a dovish Federal Reserve (Fed).


A stronger position to acquire and deliver accretion; S-REITs’ equity re-taps could be a more attractive re-entry level.

  • Strong investor support for recent equity fund-raising (EFR) and the current low cost of capital will position S-REITs to deliver value-accretive acquisitions. Thus, we expect more S-REITs to tap the market to fund their inorganic strategy which may present better attractive entry points.
  • For selected mid-cap REITs such as Ascott Residence Trust (SGX:A68U), Keppel DC REIT (SGX:AJBU) and Manulife US REIT (SGX:BTOU) which may be at the cusp of inclusion in major property indexes, additional EFR might trigger greater interest and fund flows from global investors, a positive to the overall S-REIT market.


Potential upside from lowering interest rate assumptions

  • While a large part of consensus expectations of 2-3 interest rate cuts by the Fed in 2019 has been priced in, our scenario analysis illustrates a 50-bp cut in risk-free and debt costs could bring 5-14% upside to our TPs. These expected rate cuts act as an insurance policy to US/global growth and safeguard the upturn in Singapore rents and acceleration in DPU growth.
  • Furthermore, S-REITs still offer the highest absolute yields globally, which should lend support to valuations.


Tighter-yield S-REITs justified.

  • Over the past 12-18 months, we had advocated investors remaining vested in S-REITs. This was on the back of an improving DPU growth profile moving from an oversupplied to undersupplied market across the office, industrial, retail and hotel sectors in Singapore which should result in compression in yields and yield spreads, and a rally in share prices. See S-REITs Share Price Performance.
  • In addition, despite the strong run in share prices, in April, we saw strong prospects for S-REITs to rally another 10% as investors priced in interest rates being “lower for longer” with valuations approaching May 2013 levels. In May 2013, consensus was also expecting low interest rates for the foreseeable future.
  • This has largely played out with the S-REIT index up 5% or 7% including distributions since our April report and many S-REITs trading at -1.0 SD or -1.5 SD yield spreads. This is contrary to many other market participants who at the start of the year or even in April 2019 argued that investors should take profits given yields and yield spreads were below the 5-year historical average.
  • Our contention was justified given a more positive organic growth outlook and support from a “dovish” US Fed.


Two to three interest rate cuts supportive of S-REITs and economic growth.

  • Heading into 2H19, the market and our DBS economists are expecting 2-3 rates cuts by the Fed. While this could be taken negatively, our DBS house view is that interest rate cuts are expected to provide an insurance policy against the impact of the recent trade tensions on US/global economic growth.
  • Such a scenario has a historical precedent, when the Fed cut interest rates three times from 6.0% to 5.25% between July 1995 and January 1996. Back then, there were concerns that the Fed’s rate hikes could be overdone, with growth and inflation both moderating, and a president seeking a re-election, which has some parallels with the current situation. However, current demand outlook remain healthy, supporting our thesis of a continued upturn of rent hikes across the office, retail, industrial and hotel sectors leading to improving DPU growth.
  • Beyond interest expense savings, valuations of S-REITs should be supported by declines in the cost of capital. Based on our estimates, if we were to reduce our risk-free rate by 50bps from 3.0% to 2.5% and lower our debt assumptions by 50bps while keeping our rental assumptions, our target prices would increase by 5-14% which provides, another 1-33% capital upside from current levels. Thus, while a significant proportion of lower interest rate expectations have been priced in, we believe there is still some potential upside and any correction in share prices should be shallow.


Kicker from acquisitions to take S-REITs to the next level.

  • Acquisitions will be the next major re-rating catalyst for S-REITs, thanks to the lower cost of capital. Based on the average cost of capital for most REITs and prospective asset yields, equity raisings to fund acquisitions should be DPU/yield accretive. This, in our view, should take overall share prices for S-REITs to the next level.
  • In addition, for select stocks which are on the cusp of index inclusion in major property indexes, the increase in market cap or free-float-adjusted market cap may cause a material increase in stock prices. For example, when Frasers Logistics & Industrial Trust (SGX:BUOU) was added to the FTSE EPRA/NAREIT Global Real Estate Index in March 2019, it outperformed by c.4% despite concerns over a depreciating AUD versus SGD.
  • The criteria for index inclusion in the FTSE EPRA NAREIT Developed Asia index includes:
    1. Common stock listed in an eligible country and stock exchange,
    2. Classified in ICB Supersector Real Statesecto Rela Estate,
    3. Deriving at least 75% of EBITDA from relevant real estate activities,
    4. Minimum free float of 5%,
    5. Minimum 0.3% of the index market cap,
    6. Median daily turnover greater than 0.05% of a securities market cap,
    7. Detailed annual report in English.
  • Based on these criteria, we have identified Ascott Residence Trust (SGX:A68U), Keppel DC REIT (SGX:AJBU) and Manulife US REIT (SGX:BTOU) as stocks that could be included in the index after another S$100-200m round of equity-raising.
  • Near term, we expect some S-REITs to be range bound as investors wait for the equity fund raisings.


Preferred S-REIT picks



Overview of our top S-REIT picks


ASCENDAS REIT (SGX:A17U)

  • Investment Rationale
    • REIT with consistent track record of delivering steady DPU growth.
    • Bottoming of industrial rents with prospects of improvement in rents going forward.
    • Upside risk to NAV and medium-term earnings from the redevelopment of Ascendas REIT’s older properties at Science Park.
    • Boost from potential acquisitions in Singapore, Australia and Europe post completion of merger between CapitaLand and its Sponsor Ascendas-Singbridge given current low cost of capital.
  • Risks:
    • Major downtime in manufacturing sector resulting in declines in industrial rents contrary to our expectations.
    • Significant depreciation of AUD and GBP vs SGD.

CAPITALAND RETAIL CHINA TRUST (SGX:AU8U)

  • Investment Rationale
    • Attractive valuations with current yield spreads at historical average compared to other S-REITs at -1.0 or -1.5SD plus attractive 6.7% yield.
    • Benefits from recent portfolio reconstitution (selling mature low-growth assets and recycling into higher-yield or growth malls) yet to flow through.
    • Healthy rental reversion ahead and recent acquisitions to translate into 3-year DPU CAGR of c.3%.
  • Risks:
    • Competition from online or slowdown in the Chinese economy resulting in lower-than-expected rents.
    • Depreciation of the RMB versus SGD.

FRASERS CENTREPOINT TRUST (SGX:J69U)

  • Investment Rationale
    • Exposure to North Point and Causeway Point, dominant malls in the North of Singapore which is a region with higher-than-average population growth and lower-than-average retail space per capita.
    • Recent acquisition of one-third interest in Waterway point and stake in PGIM portfolio to drive near-term and medium-term growth.
    • Potential inclusion in FTSE Nareit index to drive greater investor interest and fund flows into the stock.
  • Risks
    • Competition from online or slowdown in the Singapore economy resulting in lower-than-expected rents.

KEPPEL-KBS US REIT (SGX:CMOU)

  • Investment Rationale
    • Poised to benefit from growing demand for office space from the technology sector with c.61% of the portfolio located in Seattle and Austin.
    • Attractive valuations with Keppel-KBS US REIT trading at an 8.2% yield with its yield spread above its mean at +0.8 SD.
    • Strong DPU growth profile (3-year DPU CAGR of c.8% arising from recent acquisitions, prior rental reversions and rise in spot rents)
  • Risks:
    • Slowdown in the US economy resulting in lower-than-expected rents.
    • Adverse tax changes in Singapore or US which results in the need to restructure Keppel-KBS US REIT’s corporate structure and greater-than-expected tax leakage.

MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U)

  • Investment Rationale
    • Portfolio anchored by Festival Walk (c.62%) in HK which is a best-in-class mall with strong track record of resilience and ability to drive healthy rental growth.
    • Earnings tailwinds from 2-28% positive rental reversions achieved in FY18 with expectations of positive rental reversions ahead.
    • Attractive 5.5% yield which is high relative to other large-cap S-REITs.
  • Risks.
    • FX volatility arising from movements in the HKD, RMB and JPY exchange rates.
    • Slowdown in the HK retail market affecting Mapletree North Asia Commercial Trust’s ability to drive rents higher at Festival Walk.

SUNTEC REIT (SGX:T82U)

  • Investment Rationale
    • Beneficiary of rise in office rents and turnaround of Suntec City Mall.
    • Trades at c.0.90 P/Bk with upside risk of at least S$0.15 to Suntec REIT’s NAV of c.S$2.09 if pegged to recent market transactions.
    • Proceeds from recent equity-raising yet to be deployed, presenting upside risk to earnings which has yet to be incorporated into consensus estimates.
  • Risks.
    • Slower-than-expected increase in office rents.
    • Failure to sustain improvement at Suntec City Mall.
    • Significant depreciation in the AUD vs SGD.

S-REITs Numbers & Peer Comparison

  • See attached PDF report for
    • S-REITs peer comparison;
    • S-REITs P/Bk and Yield spread versus averages since 2010 and May 2013 before the “taper tantrums” and when consensus expected interest rates to be lower for longer; and also
    • S-REITs’ yield spread, implied yield SD and yield spread sensitivity analysis.





Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | Carmen TAY DBS Research | https://www.dbsvickers.com/ 2019-06-27
SGX Stock Analyst Report BUY MAINTAIN BUY 3.200 SAME 3.200
BUY MAINTAIN BUY 1.650 SAME 1.650
BUY MAINTAIN BUY 2.850 SAME 2.850
BUY MAINTAIN BUY 0.900 SAME 0.900
BUY MAINTAIN BUY 1.600 SAME 1.600
BUY MAINTAIN BUY 2.120 SAME 2.120



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