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S-REITs 2020 Outlook & Strategy - DBS Research 2019-12-12: Insatiable Growth Appetite

REITs 2020 Outlook & Strategy - DBS Research | SGinvestors.io SUNTEC REAL ESTATE INV TRUST (SGX:T82U) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) ASCENDAS INDIA TRUST (SGX:CY6U) KEPPEL DC REIT (SGX:AJBU) FAR EAST HOSPITALITY TRUST (SGX:Q5T)

REITs 2020 Outlook & Strategy - Insatiable Growth Appetite




Outlook


SG Property Sector enters second year of recovery.

  • The real estate market is projected to be in the second year of recovery on the back of a supply tail-off beginning in 2018. With passing (or expiring) rents in 2020 across most sectors being lower than current rent levels, we remain comfortable that most real estate sub-sectors can continue to deliver positive rental reversions in 2020.
  • We see the rentals in the industrial, retail and hospitality sectors in their early stages of the recovery while the office sector is expected to see more modest growth after posting close to a 18% rise in spot rents from the lows in 2017.

S-REITs to deliver an acceleration in DPU growth to 2.7% in 2020, riding on improving fundamentals.

  • The S-REITs are expected to benefit from the projected positive demand-supply dynamics supported by a gradual rebound in Singapore’s economy heading in 2020. This, on top of robust acquisition activities in 2019, will drive S-REITs to deliver a DPU growth of 2.7% in 2020 (vs 1.9% in 2019).
  • However, forward growth ranges between 1% and 5%. We see higher growth in the industrial and retail names, followed by office and hospitality S-REITs.

S-REITs to continue to pursue acquisitions in FY20; further upside to growth projected.


The sweet spot – extended WALEs and WADEs boost income visibility.

  • The pursuit of acquisitions overseas has brought diversity for S-REITs but also improved income visibility as overseas acquisitions are typically supported by long weighted average lease expiries (WALEs) which boosted income growth.
  • At the same time, S-REIT managers have also taken advantage of the lower interest rates to lock in debt costs for longer tenures. With an improved top-line and debt cost visibility, we believe this combination will result in stronger income growth potential.

Re-rating for the S-REITs if the Monetary Authority of Singapore (MAS) lifts the gearing limit further.

  • We expect the conclusion of the MAS consultation paper to result in a potentially higher regulatory cap and drive expectations of more debt-funded acquisition activities, given renewed firepower to compete more actively in the global landscape.
  • In our sensitivity analysis, we found that every 5% increase in the sector’s gearing (from 35% to 40%/45%/50%) will imply up to S$10-15bn in new potential acquisitions, a rise of 7-27% from current levels. At an assumed 3% spread (initial yield – average debt costs), we see average sector yield of 5.2% rising by another c.30bps (at 40% gearing) to c.60bps (at 45% gearing) and c.100bps (at 50% gearing).

Watch out for the steepening of the yield curve; S-REITs with growth and pipelines preferred.

  • DBS expects a 25-bp increase per annum steepening in the yield curve by the end of 2020 and 2021 to 2.0% and 2.25% respectively. As S-REITs are typically priced off 10-year bonds, we take comfort that current yield spreads of 3.7% can be maintained given a similar pace of DPU growth. In fact, we see potential upside in growth momentum if the S-REITs continue to acquire or tap their sponsors for acquisitions, which are not priced in at this moment.
  • Hence, we expect investors to look out for and gravitate towards metrics such as
    1. REITs which leverage on structural growth drivers like the industrial sector (data centres, logistics and business parks) where demand for space is less elastic and thus remain on an upward momentum, and
    2. REITs with high inorganic growth potential with visibility from untapped pipelines from their respective sponsors.

The dark horse.

  • The hospitality sector, in our view, may be the “dark horse” given the triple boost from
    1. diversion in traffic from other cities in the region,
    2. more conference travellers and participants due to a robust event outlook, and
    3. merger & acquisition activities.
  • With the sector largely under the radar among institutional investors, the ability to surprise on the upside is high. While we are only projecting a 1.0% rise in DPUs in our estimates, we believe there could be an upward surprise.


Risks


Steeper-than-expected climb of the yield curve.

  • While the US Federal Reserve is expected to keep rates flat next year, a return to a hike momentum could present downside risk to our DPU estimates and valuations. As S-REITs are priced off 10-year bond yields, expectations of declining yield spreads could result in a de-rating of the sector.

Lower-than-expected rise in spot rents, translating into weak rental reversions.

  • While we expect demand to continue to remain healthy leading to a recovery in rents, the ongoing trade war poses downside risk to our occupancy and rental assumptions.


Valuations and Stock Picks


Yield spreads are still attractive.

  • While S-REITs currently trade at a forward FY19/20F yield of c.5.5% at +1 standard deviation, yield spread remain attractive at 3.7% close to their historical yield spread levels. The ability to deliver a sustained growth in DPUs will be the key to maintaining current valuations.

Overweight with preference for names with structural growth and acquisition pipelines.






Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-12-12
SGX Stock Analyst Report BUY MAINTAIN BUY 2.150 SAME 2.150
BUY MAINTAIN BUY 2.750 SAME 2.750
BUY MAINTAIN BUY 1.650 SAME 1.650
BUY MAINTAIN BUY 2.200 SAME 2.200
BUY MAINTAIN BUY 0.800 SAME 0.800


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