Singapore REITs - RHB Invest 2020-06-23: Liquidity-driven Rally Marches On; OVERWEIGHT

Singapore REITs - RHB Invest | SGinvestors.io SUNTEC REAL ESTATE INV TRUST (SGX:T82U)

Singapore REITs - Liquidity-driven Rally Marches On; OVERWEIGHT

  • Keep OVERWEIGHT on S-REITs; stay selective amidst recent rally.
  • S-REITs have rebounded 38% from March lows and are now trading closer to long-term mean valuations. See S-REITs Share Price Performance. Signs of liquidity returning coupled with the central bank’s pledge to keep interest rates low should keep investors’ interest in S-REITs high.
  • We recommend investors to continue to accumulate laggard plays with strong sponsor backing, quality assets and operational track record.

Retail clients emerged as net buyers in the recent rally

  • Retail clients emerged as net buyers in the recent rally (Mar-Jun 2020), while institutional investors were net sellers, based on SGX fund flow data. We believe this is due to more account openings seen recently and limited savings options pushing retailers to REITs.
  • The latest Monetary Authority of Singapore (MAS) data indicated a record jump in total SGD deposits (+10% y-o-y) and overseas resident deposits (+44% y-o-y), a testimony to Singapore’s growing safe haven status.
  • Reuters also reported that private banks plan to increase staff managing Chinese and Hong Kong wealth offshore by up to a third, largely focusing on Singapore – a sign of larger anticipated inflows. Singapore’s growing wealth management hub status augurs well for REITs’ long-term growth.

Expecting a better 2H.

  • 2Q is expected to be the trough quarter for REIT earnings as the rental rebates/deferrals impact during the Circuit Breaker (CB) period flows through.
  • Overall, we expect REITs to remain cautious amidst fluid market conditions and retain a portion of distributable income similar to 1Q. The earlier-than-anticipated opening of CB Phase 2 on 19 Jun – with most economic sectors opened – has brought in some cheers, especially in the retail sector.
  • Barring a second COVID-19 wave, we expect most REITs to distribute most retained income in 2H.

Marginal impact from amended COVID-19 Bill.

  • Based on the amended COVID-19 Bill (5 Jun), commercial landlords are expected to offer 2-month rental rebates to qualifying small & medium enterprise (SME) tenants, while industrial and office SME tenants will receive one-month rebates. As most retail REITs have already set aside c.2 months of rebates, the incremental impact is minimal.
  • For industrial REITs, SMEs account for c.20-55% of the total portfolio, while the tenants that will qualify are still being assessed. For office REITs, SMEs still account for a small proportion ( < 15%).

Acquisitions back on the table; refinancing concerns have largely abated

  • Acquisitions back on the table; refinancing concerns have largely abated, with most REITs taking advantage of the low-interest rate environment and liquidity to refinance entire loans maturing in 2020 at lower interest costs.
  • Yield compression post recent rally has raised the possibility of acquisitions, with more opportunities now available in the market due to COVID-19. We expect acquisitions to pick up pace in 2H as financing and market conditions turn more favourable.

Industrial REIT remains our preferred subsector

  • Industrial REIT remains our preferred subsector as we see it as the most resilient due to limited telecommuting options, lower rental base, and lack of substitution choices. This is followed by office, hospitality, and retail REITs.
  • Hospitality REITs are likely to remain volatile in the near term until a clearer picture emerges.
  • Retail REITs remain our least preferred sector, as we believe the current crisis has accelerated structural headwinds.
  • See S-REITs peer comparison in PDF report attached below.
  • Continue to read: Singapore REITs - RHB Invest 2020-06-23: S-REITs Outlook By Sector.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-06-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.780 SAME 1.780