S-REITs 2020 Outlook - CGS-CIMB Research 2019-12-09: NEUTRAL

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S-REITs 2020 Outlook - NEUTRAL


S-REITs 2019 recap



S-REITs 2020 outlook

  • We maintain our Neutral stance on SREITs and expect the sector to perform in line with the broader market in 2020. The prospects of further rate cuts have diminished and upside catalysts are reflected in the compressed yield spread.
  • Inorganic growth drivers have largely panned out while organic growth would continue to be measured. Retail and office should still experience positive but moderated rental reversion while within the industrial segment, data centre and hi-spec rental growth should outpace that of multi-user factory space rents.
  • In terms of subsectors, we like retail best, followed by office, industrial and hospitality. See S-REITs 2019 recap and 2020 outlook by subsector below.


Valuations



Retail REITs 2019 recap

  • Singapore retail sales in 9M19 were relatively weak. Seasonally adjusted retail sales index declined 1.8% y-o-y on average in 9M19. Declines were seen across the board except for goods & toiletries (+1.8% y-o-y) and apparel & footwear (+2.4% y-o-y). However, the malls under retail REITs have done well and delivered stronger DPU y-o-y, except for STARHILL GLOBAL REIT (SGX:P40U). Positive rental reversion was achieved for 9M19 amid stronger shopper traffic and flattish tenant sales. The malls were almost fully occupied except for few smaller malls.
  • There was strong retail supply of ~1.4m sq ft in 2019. While Tampines Mall saw some impact from the opening of Jewel, the impact of the new malls (Funan, Jewel Changi, Paya Lebar Quarter) opened in 2019 on the malls under REITs was minimal.
  • 2019 was also an active year for the retail REITs.
  • Although CAPITALAND MALL TRUST (SGX:C38U) did not acquire any assets in 2019, it reopened Funan Mall in Apr 2019.


Retail REITs 2020 outlook


Lower retail supply going forward.

  • Retail supply in 2020 will taper down from 1.4m sq ft in 2019 to 500k sq ft p.a. in the next few years. This is substantially lower than the ~1m sf per annum in 2013-19 and should help to support rental reversions. Considering the high occupancy that the new malls have achieved, we see little impact from the strong supply in 2019. Thus, we expect spot retail rents to continue ticking up by 2-3% y-o-y in 2020.

Expect malls under REITs to remain resilient.

  • While retail sales are likely to remain weak, we expect REIT-owned malls, especially the larger ones to continue to perform well given their strategic locations and active management of tenant mix. For example, the conversion of large anchored space to smaller specialty stores would give strong rental reversion. The malls under REITs also have strong financial ability to do asset enhancements.

More expansion opportunities overseas.

  • In terms of inorganic growth, the REITs’ acquisition focus is still in Singapore but it is getting more difficult to find a good asset at reasonable pricing. We see REITs gradually scouting for expansion opportunities out of Singapore to boost DPU growth.


Office REITs 2019 recap

  • The 3Q19 URA Central Region office rental index showed a 0.4% improvement from end-2018 as tight supply continued to drive up rents. As a result, office REITs continue to enjoy positive rental reversion and fairly full occupancy.
  • YTD 9M19, office net absorption totalled 1.34m sq ft, bringing island-wide occupancy to 89.4% vs. 87.9% at end-2018. Demand came from co-working, financial services as well as TMT sectors.
  • Office REITs’ acquisition focus was on overseas assets, with developed economies of Australia, South Korea and Germany being favourite destinations.


Office REITs 2020 outlook


Expect spot rental growth of 0-3% in 2020.

  • We expect office spot rents to remain broadly stable in 2020, with projected moderated growth of 0-3% from end-2019.

Limited new supply over next two years.

  • New supply will likely remain limited in 2020 and 2021, with c1.3m/0.9m sq ft expected to be completed within the two years.

Demand to moderate.

  • We expect demand to moderate in 2020 due to macro headwinds from trade war concerns as well as abating appetite from co-working operators as growth outlook moderates.


Industrial REITs 2019 recap

  • Growth via new acquisitions featured strongly for industrial REITs in 2019. YTD Nov 19, industrial REITs raised c.S$3,243m of new equity to fund these new purchases. Common themes across these acquisitions were the shift towards data centres and overseas expansions, particularly in the US.
  • YTD-3Q19, growth in NPI and distributable income largely came from new acquisitions rather than organic growth as rental reversions were generally flattish in nature. Industrial REITs also made use of the weaker climate to announce asset enhancements and redevelopments for older properties like MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)’s redevelopment of Kolam Ayer and AREIT’s AEI at its Changi Business Park assets.


Industrial REITs 2020 outlook


Supply coming on strong.

  • According to JTC, as at 3Q19, a total supply of 1.9m sq m of industrial space (3.8% of current industrial stock) is expected to come to market in 2020. We think this could translate into c.1.3m sq m of net lettable area, which is 23% higher than the average annual supply of around c.1.1m sq m over the past three years. The issue of a large incoming supply is especially pertinent for the multi-user factories which have c.7.5% of existing stock coming on in 2020F (2.5%/2.7% for single-user factories and warehouses respectively) and a vacancy rate of 12.9% (8.9%/11.9% for single-user factories and warehouses respectively).
  • Rents at flatted factories in MAPLETREE INDUSTRIAL TRUST (SGX:ME8U), which make up 27% of its S$5.8bn portfolio value, the largest exposure across all industrial REITs, could continue to be under pressure as a result of the supply influx, in our opinion.

Sticking with well-located, high-spec properties.

  • We previously highlighted the divergence in demand between higher and lower specification assets and think this could continue in 2020. Well-located and higher specification properties could continue to see robust demand as tenants remain selective.
  • Data centre demand should also continue to remain strong, in our view, as companies undergo digital transformation coupled with Singapore’s reliable infrastructure and data governance regulations.

Overall rental growth to be slightly positive.

  • We think rents from multi-user factories could weigh on the sector with a 1-3% decline due to the aforementioned supply influx. However, we expect this to be more than offset by a stronger 3-5% growth in data centre rents and 1-3% growth in hi-spec rents.
  • Warehouse rents could be flattish y-o-y as demand continues to be displacement rather than expansionary in nature.


Hospitality REITs 2019 recap

  • Despite the low supply of just 47 rooms and slightly over 1,900 rooms in 2018 and 2019 respectively versus an average of 3k rooms in 2008-17, year-to- Sep RevPAR performance came in below expectations as the industry was still digesting the large inflow of hotel supply from the previous years. Year-to-Sep 2019 RevPAR was relatively flat at +0.8% y-o-y driven by both better average room rates (+0.4% y-o-y) and occupancy (+0.4% y-o-y). Due to the weak RevPAR, hospitality REITs, especially those with large exposure to Singapore did not perform well.
  • 2019 was an active capital recycling year for the hospitality REITs.
  • Given the weak RevPAR performance, the hospitality sector did not perform as well as the other property subsectors.


Hospitality REITs 2020 outlook


Expect stronger arrivals in 2020.

  • 2020 is a biennial event year. We expect the return of biennial events to boost tourist arrivals. While the slower economy may hamper business travel demand, tourist arrivals should be stronger as compared to the previous year.

Low supply to support RevPAR.

  • Supply is expected to stay low at 789 rooms in 2020 versus 1,703 rooms in 2019. 2020 will be the 3rd year of low supply. Hence, we expect the ongoing pricing pressure to ease significantly and translate into stronger RevPAR performance, led by economy tiered hotels.
  • Although more accommodation providers are gaining hotel licences, the total supply (hotel rooms + serviced residence with hotel licence) is still lower than the high historical supply of an average 3k p.a. In addition, the bulk of the service residence with hotel licence supply will only come in 2-3 years later.

Hotel industry facing structural changes.

  • As compared to the previous years, we believe that the industry is facing structural changes as tourists now have many more accommodation options. This coupled with the weaker economic outlook lead us to expect RevPAR to rise by about 2-3% in 2020, versus 2019 RevPAR forecast of 0-1%.


Top S-REIT Picks & Least Preferred S-REIT






LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
SGX Stock Analyst Report ADD MAINTAIN ADD 2.89 SAME 2.89
ADD MAINTAIN ADD 1.120 SAME 1.120
HOLD MAINTAIN HOLD 0.760 SAME 0.760



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