Singapore REITs - DBS Research 2020-03-11: Tough Times Don’t Last, Tough REITs Do!


Singapore REITs - Tough Times Don’t Last, Tough REITs Do!

  • Recent conversations with clients indicate that they are looking to bottom fish a select group of S-REITs.
  • Worries of margin calls impacting share prices are unwarranted, in our view.
  • Sticking to our guns; industrial REITs preferred for their resilience; suburban REITs with fortress assets to come out strong.

What’s New

  • Discussions on the S-REITs over the past week revolved around whether one should continue be in the S-REIT space despite its fairly premium valuations (1.1x P/NAV and forward yields of c.5.8%). It has been a yo-yo time for S-REIT prices over the past one and a half weeks. And now, with an almost 180-degree change (to cautious) in sentiment facing the markets, discussions with clients have been interesting and I would say that it has been a net positive, with approximately two-thirds (2/3) of the investors looking to bottom fish after the recent share price correction.

Some of the key discussion points to share:

1. Contrasting macro drivers pulling the REITs now

  • The last spanner in the works is the ongoing panic over the fall in oil prices which is not helping given the ongoing global slowdown from the COVID-19 global outbreak. This further clouds what is an already volatile macro outlook for the S-REITs. While the 50-bp rate cut by the FED brings a short-term respite to the sector, with FED funds rate at 1.00-1.25%, we see little room to move down (or cut) if economic fundamentals weaken further. Market consensus is pricing in a further 100-bp cut in FED funds rate to zero, ay to June.
  • This is expected to be music to income investors’ ears especially when the 10-year yields are projected to be anchored at around c.1.1-1.3% levels. However, it comes with some comfort that S-REITs’ yield spreads will remain wide, keeping incremental flows into the sector and valuations stable at current levels.
  • In terms of our valuation methodology, we have used a 2.5% risk-free rate in our estimates. Assuming if we use a 2.0% rate instead, we would see a 3-10% increase in our Target Price.

2. Worries of potential “margin calls” impacting share prices unwarranted, in our view.

  • S-REIT investors, especially those who have a larger concentration of non-institutional holdings, are anxious to know if they could be facing margin calls. As some of these holdings may be leveraged, the current market sell-off may spark a possible margin call and cause a steeper-than-normal drop in prices when these investors liquidate their holdings. While investors appear to be zeroing in on the smaller market cap S-REITs and the potentially EUR/USD based S-REITs, we believe that such worries are unwarranted.
  • While this may not be representative of the overall sector, in our engagement with a selected group of wealth clients (including family offices) over the years, we have in many meetings found that there is greater demand for the large-cap names, despite the lower absolute yield. Average leverage ratios are also conservative.

3. Oil & gas exposure amongst the S-REITs

  • We performed an analysis of the exposure in oil & gas firms across the sector. Our thinking is that the risk of a prolonged oil war may tighten profitability and cashflows for these firms going forward. That said, we notice that most industrial exposures are small at < 1% of portfolio revenues, with office S-REITs having exposure of between 4% and 8%. While we do not anticipate mass weakness across the oil & gas sector, the exposure is noteworthy.
  • See attached PDF for summary on SREITs' exposure to oil & gas firm.

Our preferred sectors: Sticking to our guns

Derek TAN DBS Group Research | Rachel TAN DBS Research | Singapore Research Team DBS Research | 2020-03-11
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