Singapore Property & REITs - DBS Research 2020-05-27: United We Stand, Divided We Fall

Singapore Property & REITs - DBS Research | ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Singapore Property & REITs - United We Stand, Divided We Fall

  • Cash grants to SME tenants to offset rents is a targeted approach to aid their recovery during and post Circuit Breaker.
  • New proposed Bill to compel landlords to match government assistance scheme on a 1-for-1 basis.
  • Negative for industrial and office landlords if proposed Bill is passed as most may have to cough up more rebate assistance.
  • “Worst is over” for retail landlords on the back of gradual re-opening of malls in July 2020; impact of new bill likely to be marginal.

Key measures unveiled in Fortitude Budget (4th Budget to combat COVID-19 outbreak).

Cash grants to support SME tenants.

  • The government will provide further assistance to qualifying Small & Medium Enterprises (SMEs) through a cash grant which will be disbursed to the landlord, which is in turn is required to pass this on to their SME tenants.
  • Retail SME tenants will receive a new cash grant to offset rental costs approximating 0.8 months of rent. This will bring total rental rebates provided by the government to about two months, including property tax rebates passed on by landlords announced in the previous budgets.
  • For SME tenants that are leasing non-retail properties (industrial/office), a cash grant of approximately 0.64 months of rents will be provided by the government, bringing total government support worth about one month of rent.

New Rental Waiver Bill (“New Bill”) to be passed in June 2020

  • A new Bill will be tabled in June 2020 which will mandate landlords to grant rental waivers to qualifying SME tenants who have suffered a significant revenue drop as a result of COVID-19. If the new Bill is passed by Parliament, qualifying SME tenants in retail properties will benefit from a total of four months of rental relief shared equally between the Government and landlords.
  • SME tenants of industrial and office properties will also be given some relief.

What is a Qualifying SME?

  • Qualifying SME tenants will have to fulfil certain requirements such as an annual turnover of not more than S$100m, and with qualifying leases or licenses commencing before 25 March 2020. This includes tenants who are running trade or businesses from their own premises.

Our thoughts:

S-REITs will likely see further deterioration in near term cashflows; more clarification from the proposed new bill needed.

  • The additional cash grants (neutral to S-REITs’ cashflows) will come in handy for landlords as it provides ammunition for them to assist tenants more meaningfully during Circuit Breaker (Apr-May) and after. However, the new Bill is expected to result in additional downside to S-REITs’ cashflows in the near term.
  • Upon passing of the new Bill, landlords will have to share equally the burden of total rental reliefs to qualifying SME tenants (4 months for retail properties, 2 months for office/industrial properties). This means that retail landlords will have to bear 2 months of rental reliefs out of their own pockets while industrial & office landlords will bear the cost for up to 1 month of rent.
  • With no further details of the new Bill for now, the uncertainty lies in the actual assumed start date either from
    1. March 2020 (start of economic impact from COVID-19) or
    2. April 2020 (start of Circuit Breaker) to compute the period of rent waivers that landlords are mandated to offer to tenants.
  • This has differing impact on the various S-REITs. This is because most listed S-REITs have proactively given assistance with most providing between 0.4 months to 3.0 months of rental rebates (before property tax rebates of c.1.0 month) while office S- REITs & Industrial S-REITs have taken a more targeted approach in their own rental relief programs.
  • While the devil is in the details which will only be provided in June 2020, assuming that the rent rebates are calculated from March 2020, we estimate that most retail S-REITs will have to cough up between an additional 1.0 months to 1.6 months of rental rebates with the exception of Mapletree Commercial Trust (SGX:N2IU) and SPH REIT (SGX:SK6U).
  • Although the Bill is for a select group, the key lies in the eligibility criteria for the rental waiver that could differentiate those in real needs vs those who are opportunistic. We expect that the Ministry of Law will provide more clarity taking into consideration a more equitable measure for all stakeholders.
  • Office and Industrial SREITs that may have a larger proportion of SME tenants such as Ascendas REIT (SGX:A17U), Mapletree Industrial Trust (SGX:ME8U), Mapletree Logistics Trust (SGX:M44U), Suntec REIT (SGX:T82U) and OUE Commercial REIT (SGX:TS0U) and the mid-cap industrial S-REITs will have to do more to assist their tenants.

A welcome relief as we can see “light at the end of the tunnel”.

  • Despite landlords (especially retail landlords) now having to dip more from their own ‘pockets’, we see some light at the end of the tunnel. This new Bill should help to quantify the fixed amount of rental relief and could be seen as some form of ‘closure’ to the rental support scheme extended by the landlords, removing the overhang. As such, we hope that this represents the final round of rental waivers as businesses progressively start to reopen from July 2020 and recovery gathers momentum going forward.

Extraordinary times call for extraordinary “one-off” measures.

  • While we would have preferred that the government had left it to the private market (i.e. between private landlords and tenants) to resolve any disputes on their own, we hope that the series of government interventions in contractual obligations and the upcoming new Bill) will be seen by investors as a “one-off” given the extraordinary and unprecedented circumstances.

Extended Jobs Support Scheme and Foreign Worker Levy waiver and rebate are indirect supports for developers.

  • The extension of the Jobs Support Scheme by 1 month to Aug 2020 and 2 months extension of Foreign Worker Levy waiver and rebate for up to 2 months (100% in June and 50% in July) bodes well for the developers indirectly via their contractors and some subsidies for local employees.

Financial support to ensure the survival of businesses.

  • The extended Jobs Support Scheme, financing support for promising startups and to support businesses in digital transformation is necessary for survival of businesses and to ensure that these businesses have sufficient means to adapt to changes brought about by COVID-19 post the Circuit Breaker. The survivability of these businesses benefits landlords indirectly especially industrial REITs and to a certain extent, office REITs.

See PDF report attached below for summary of impact on various real estate subsectors and companies.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Dale LAI DBS Research | 2020-05-27
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