S-REITs Weekly - UOB Kay Hian 2020-06-23: Rotate & Reposition Towards Retail & Hospitality REITs For Outperformance In 2H20

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CAPITALAND MALL TRUST (SGX:C38U) FRASERS CENTREPOINT TRUST (SGX:J69U) ASCOTT RESIDENCE TRUST (SGX:HMN) FAR EAST HOSPITALITY TRUST (SGX:Q5T) KEPPEL REIT (SGX:K71U)

S-REITs Weekly - Rotate & Reposition Towards Retail & Hospitality REITs For Outperformance In 2H20

• Industrial REITs outperformed in 1H20. We rotate and reposition towards retail REITs and hospitality for outperformance in 2H20.
• Our top 5 picks for S-REITs are
  • retail REIT CapitaLand Mall Trust (SGX:C38U) (Target Price: S$2.60), and Frasers Centrepoint Trust (SGX:J69U) (Target Price: S$2.85),
  • hospitality REIT Ascott Residence Trust (SGX:HMN) (Target Price: S$1.16), Far East Hospitality Trust (SGX:Q5T) (Target Price: S$0.62) and
  • office REIT Keppel REIT (SGX:K71U) (Target Price: S$1.30).
• Maintain OVERWEIGHT on the sector.

WHAT HAPPENED LAST WEEK

UOBKH S-REIT Index retraced 0.3% to 249.6 last week.

• The Multi-Ministry Taskforce announced an earlier start to Phase Two on 18 Jun 20. Retail businesses re-opened their physical outlets, while food & beverage dine-in was allowed, subject to liquor sales and consumption ceasing at 10:30pm. Sports, parks and other public facilities also opened. Small-group social gatherings of up to five persons can resume. Individuals must maintain safe distancing of at least 1m at all times.

Top outperformers.

• Lendlease REIT (SGX:JYEU) gained 8.1% last week after winning a tender to redevelop the 48,200sf car park at Grange Road into a new multi-functional event space.
• ARA LOGOS Logistics Trust (SGX:K2LU) increased 7.5%, playing catch-up to other logistics REITs.
• Mapletree Industrial Trust (SGX:ME8U) increased 6.0% due to inclusion into FSSTI starting 22 June.
• Ascott Residence Trust (SGX:HMN) increased 6.0% due to inclusion into FTSE EPRA NAREIT Global Real Estate Index (Global Developed) from 22 June.

Top underperformers.

• Office-related REITs Keppel REIT (SGX:K71U), Suntec REIT (SGX:T82U), CapitaLand Commercial Trust (SGX:C61U) and Mapletree Commercial Trust (SGX:N2IU) corrected 3.5%, 2.0%, 1.7% and 1.0% respectively.
• CapitaLand Retail China Trust (SGX:AU8U) and Sasseur REIT (SGX:CRPU) corrected 1.5% and 0.7% due to a second wave of COVID-19 outbreak in Beijing, China.
• See
  • S-REITs Share Price Performance;
  • S-REITs Target Price & Rating.

SPOTLIGHT – MID-YEAR REVIEW

• COVID-19 was detected in Wuhan, China, and was first reported to the World Health Organisation (WHO) Country Office in China on 31 Dec 19. The outbreak was declared a Public Health Emergency of International Concern on 30 Jan 20. WHO made the assessment that COVID-19 can be characterised as a pandemic on 11 Mar 20. By then, COVID-19 has spread beyond Asia to Europe and North America.

Steep sell-off in March, followed by gradual recovery in 2Q20.

• Initially, the stock market was unruffled by COVID-19 outbreak and our S-REIT index gained 4.7% in January. S-REITs only started to react by correcting 7.6% during the last week of February. With COVID-19 spreading rapidly in Europe and North America, our S-REITs index corrected another 31.5% during the first three weeks of March.
• Many countries have since instituted strict social distancing measures and lockdowns. Confidence gradually recovered with governments responding swiftly with proactive fiscal and monetary policies, which engendered a recovery for S-REITs.

Resiliency from industrial and healthcare REITs in 1H20.

• Industrial and healthcare REITs were the top performers in 1H20. Keppel DC REIT (SGX:AJBU), Mapletree Logistics Trust (SGX:M44U), Mapletree Industrial Trust (SGX:ME8U) and Parkway Life REIT (SGX:C2PU) gained 19.8%, 13.6%, 11.8% and 5.0% ytd respectively.
• Office REITs were also fairly resilient with Keppel REIT (SGX:K71U) and CapitaLand Commercial Trust (SGX:C61U) losing only 8.3% and 11.5%. Retail REITs lost 16.2% ytd with suburban malls (Frasers Centrepoint Trust (SGX:J69U): -11.2%) being more resilient compared to downtown malls (Starhill Global REIT (SGX:P40U): - 22.9%).
• International REITs lost 17.1% ytd with Manulife US REIT (SGX:BTOU) and Prime US REIT (SGX:OXMU) down 22.9% and 13.8% respectively.
• Hospitality REITs were worst hit with CDL Hospitality Trusts (SGX:J85) and Far East Hospitality Trust (SGX:Q5T) correcting 28.6% and 26.7% ytd respectively.

Zero interest rates for two-and-a-half years.

• The Fed wants to provide an environment in which displaced workers have the best chance to go back to their old jobs or find new ones. All 17 FOMC participants (100%) expect to hold Fed funds rates near zero in 2021 and 15 of them (88%) projected Fed funds rates near zero until 2022. This means another two-and-a-half years of zero interest rates.

Assurance of the Fed’s dovish disposition positive for S-REITs.

• The Fed’s intention to gradually nurse the labour market back to health entails many years of policy accommodation. Investors’ interest will be fixated on yield plays, such as S-REITs. Industrial REITs have outperformed in 1H20.
• We rotate and reposition towards retail REITs and hospitality for outperformance in 2H20. Our top 5 picks for S-REITs are:
  • retail REIT CapitaLand Mall Trust (SGX:C38U) (Target Price: S$2.60), and Frasers Centrepoint Trust (SGX:J69U) (Target Price: S$2.85),
  • hospitality REIT Ascott Residence Trust (SGX:HMN) (Target Price: S$1.16), Far East Hospitality Trust (SGX:Q5T) (Target Price: S$0.62) and
  • office REIT Keppel REIT (SGX:K71U) (Target Price: S$1.30).

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-06-23

SGX Stock Analyst Report BUY MAINTAIN BUY 2.600 SAME 2.600

BUY MAINTAIN BUY 2.850 SAME 2.850

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BUY MAINTAIN BUY 0.620 SAME 0.620

BUY MAINTAIN BUY 1.300 SAME 1.300