Singapore REITs - UOB Kay Hian 2020-03-18: Whipsawed By Reversal In Flight To Safety

Singapore REITs - UOB Kay Hian Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) FRASERS CENTREPOINT TRUST (SGX:J69U) CAPITALAND COMMERCIAL TRUST (SGX:C61U) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) CAPITALAND MALL TRUST (SGX:C38U)

Singapore REITs - Whipsawed By Reversal In Flight To Safety




WHAT’S NEW


COVID-19 outbreak under control in Singapore.

  • Singapore reported its first confirmed case of COVID-19 infection, a 66-year-old male Chinese national from Wuhan, on 23 Jan 20. Since then, the number of confirmed cases has gradually increased. As of 17 Mar 20, Singapore has 266 confirmed cases. 114 patients have been discharged while 152 patients remain hospitalised, of which 14 are in critical conditions.

Contagion across countries and continents.

  • Globally, the number of confirmed cases outside of China has grown at an alarming rate across many countries. The total number of confirmed cases has reached 24,747 for Italy, 14,991 for Iran, 8,236 for South Korea, 7,753 for Spain and 5,380 for France. This poses high risk of imported cases into Singapore. Thus, the Ministry of Health (MOH) has warned that Singaporeans must be prepared for a significantly higher number of new confirmed cases in time to come.

Singapore the gold standard in combating COVID-19.

  • World Health Organisation (WHO) director general Tedros Adhanom Ghebreyesus has praised Singapore for its approach in tackling the COVID-19 outbreak and communicating to the public. He was very impressed with the efforts made to find every case through contact tracing and testing every suspected case, leaving no stone unturned.

Reversal of flight to safety.

  • The COVID-19 outbreak triggered a massive flight to safety. In the US, 10-year government bond yield collapsed by 1.38ppt ytd to 0.54% last Monday, a historic low. In Singapore, 10-year government bond yield has similarly dropped by 0.73ppt ytd to 1.01%. Even safe heaven assets, such as government bonds, were sold down as COVID-19 spread rapidly in the US last week, resulting in a spike in 10-year government bond yield of 42bp in the US and 47bp in Singapore.

Some calming of nerves.

  • Financial markets have calmed down after the FED’s intervention. 10-year government bond yield has since receded in the US and in Singapore in aggregate on Monday and Tuesday.


ACTION


REITs benefit from wider yield spread.

  • Yield spread will widen due to the drastic fall in government bond yield caused by a massive flight to safety. We estimate that yield spread for S-REITs has widened by 0.7ppt to 4.1% in 1Q20.

Value resurfaces after steep correction.

  • Many S-REITs experienced a drastic correction when safe heaven assets were sold down last week. We prefer S-REITs with more exposure to Singapore, where the COVID-19 outbreak is under control.

Industrial REITs: Benefits from shift in manufacturing supply chain.

  • Manufacturing supply chains within China have been disrupted. Resumption of production would take time. Manufacturers could respond by ramping up production at alternative facilities located outside China, such as Southeast Asia.
  • Properties in Singapore accounted for 72% and 81.5% respectively of Ascendas REIT (SGX:A17U) (BUY/ Target: S$3.35) and Mapletree Industrial Trust (SGX:ME8U)’s (BUY/Target: S$2.90) portfolio valuation. Both S-REITs do not have exposure to China. Data centres, which benefit from the increase in online activities and e-commerce, accounted for 26.2% of Mapletree Industrial Trust’s portfolio valuation.

Retail REITs: Suburban malls more resilient.

  • Suburban malls catering to necessity spending are more resilient. However, retail malls along Orchard Road are more affected by the huge drop in tourist arrivals. Shopper traffic has dropped by 30-35% for suburban malls and 50% for retail malls along Orchard Road since DORSCON level was raised from Yellow to Orange on 7 Feb 20, but has since recovered moderately as consumers adapted to the new reality.
  • The merger of CapitaLand Mall Trust (SGX:C38U) (BUY/Target: S$2.88) and CapitaLand Commercial Trust (SGX:C61U) will boost CapitaLand Mall Trust’s DPU by 1.6% and NAV by 1.6%. Suburban malls accounted for 48% of CapitaLand Mall Trust’s portfolio valuation. CapitaLand Mall Trust also provides an attractive 2020F dividend yield of 7.0%.
  • We also like Frasers Centrepoint Trust (SGX:J69U) (BUY/Target: S$3.05) as a pure play on resiliency and defensiveness of suburban malls.

Office REITs: Resiliency strengthened by long WALE.

  • Many companies have implemented Business Continuity Plans by assigning a portion of staffs to work from home (split teams). There are sporadic episodes of COVID-19 infections at office buildings, such as MBFC, but affected floors have been disinfected. By and large, the daily operations of most office buildings are unaffected.

Limited office supply in Singapore during 2020 and 2021.

  • 1.89m sf and 1.24m sf of office supply is scheduled to complete in 2020 and 2021 respectively. The portions located within the core CBD are limited to 1.13m sf (60% of total) and 0.64m sf (51% of total) respectively for 2020 and 2021. Competition would only pick-up in the form of Central Boulevard Towers (1.26m sf) and Guoco Midtown (0.65m sf) in 2022. Total office supply of 5.11m sf during 2020-23, equivalent to 1.28m sf per year, is 28% lower than the 10-year historical average supply of 1.77m sf.
  • CapitaLand Commercial Trust (SGX:C61U) (BUY/Target: S$2.30) has a long WALE of 5.7 years by NLA. Office space representing 22% of gross rental income is subject to renewal this year, of which 8% is already completed. Based on CapitaLand Mall Trust’s closing price of S$1.90, CapitaLand Commercial Trust is worth S$1.63 (0.72 new CapitaLand Mall Trust units + S$0.259 in cash) assuming the merger between CapitaLand Mall Trust and CapitaLand Commercial Trust is approved and completed. Thus, there is an arbitrage opportunity to BUY CapitaLand Commercial Trust.

Healthcare REITs: Rides on aging population.

  • Healthcare REITs benefit from the diversion of local patients from government hospitals, which are at the forefront of the war against COVID-19, to private hospitals. This helps mitigate the drop in the volume of foreign patients. The extension of master leases for Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital, which end in Aug 22, would result in higher base rents for Parkway Life REIT (SGX:C2PU) (BUY/Target: S$3.78) while maintaining annual rental escalation at Consumer Price Index (CPI) + 1%.


SECTOR CATALYSTS

  • Environment of persistently low interest rates, which will keep interest fixated on yield plays, such as S-REITs.
  • Limited new supply for office, hotel, logistics and retail segments in 2020.


ASSUMPTION CHANGES

  • We kept our earnings forecast unchanged.


RISKS

  • COVID-19 outbreak results in many countries imposing lockdown, which restrains economic activities.

See also





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-03-18
SGX Stock Analyst Report BUY MAINTAIN BUY 3.350 SAME 3.350
BUY MAINTAIN BUY 3.050 SAME 3.050
BUY MAINTAIN BUY 2.300 SAME 2.300
BUY MAINTAIN BUY 2.900 SAME 2.900
HOLD MAINTAIN HOLD 2.880 SAME 2.880



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