Singapore REITs - RHB Invest 2020-06-23: S-REITs Outlook By Sector


Singapore REITs - S-REITs Outlook By Sector

Industrial REITs – Slowly moving to a recovery path

Singapore’s Purchasing Managers’ Index (PMI) and non-oil domestic exports (NODX) data offer hope for a recovery.

  • Singapore’s factory sentiment improved both overall and in the electronics sector in May, recovering from April’s levels, which were the lowest since 2008. The PMI – an early indicator of factory activity – rose 2.1 pts to 46.8 pts in May, while the electronics sector PMI rose 3.4 pts to 46.2 pts. Similarly, NODX has remained resilient so far with y-o-y growth seen until April. May NODX fell 4.5% y-o-y, dragged down by an 8.8% decline in non-electronic exports.

Overall rental rebates likely to be less than 0.5 months.

  • Based on the amended COVID- 19 Bill (Rent Relief Framework For SMEs), industrial landlords are required to provide one month of rent rebate for qualifying industrial SME tenants and two months of rent rebates for retail SME tenants in their premises. A qualifying SME is defined as one with an annual turnover of less than SGD100m and which has seen a 35% or more drop in revenue during the April and May period.
  • We note that SME tenants account for 20-55% of industrial SREITs’ Singapore portfolio based on our discussions with respective managements, while the percentage of tenants that qualify is still being assessed. We also understand that rent relief is provided only for net rents and excludes service and maintenance charges which typically account for ~30% of total rents. As such, the overall impact on industrial SREITs remains manageable at less than 0.5 months of rent rebates, in our view. In terms of rent deferrals, landlords have been taking a more case-by-case approach, and we expect less than 10% of tenants to defer their rents for a period not exceeding three months.

Supply pressures mitigated after 2020.

  • While industrial supply is expected to jump to 2.2m sqm for 2020 (50% higher than average supply in 2016-2019), it is tilted towards factory space. About 40% of the supply is for single-user factory space (typically for own use). Another 40% of the supply is in multiple-user factory space, of which c.50% is intended for replacement leases that are affected by JTC’s industrial revolution programme, while the remaining 20% is for the warehouse and business park space.

Business parks and high-tech industrial remain our preferred sub segments.

Office REITs – Long leases and low expiring rents mitigate impact

Rising trend of flexible office space partly mitigated by de-densification trends.

  • Much of the concerns on office demand has been around the rising trend of working from home (WFH). Our view is that companies are more likely to take a core+flex approach, by which companies are likely to maintain a core long-term working space with rest of demand shifting to flexible leases. While this trend may result in a 5-10% reduction in office demand over the medium to long term, it is likely to be offset by recent de-densification trends which have resulted in more per sqf space per employee – and, as a result, overall increase in office space.
  • Our discussions with REITs also indicate that there has been some spillover of demand seen from companies shifting from Hong Kong, especially family offices and office leases for Business Continuity Plans. However, this has not been significant so far.

Minimal impact from SME rent relief framework.

  • As the proportion of SME tenants and retail tenants remain small (below 20%) for office S-REITs, the impact of rental rebates from the rent relief framework is expected to be minimal. Based on our discussions, rental deferral requests from office tenants also remain low in the single digits.

Supply remains moderate, buffering some of the impact.

  • Based on CBRE data, total supply for 2020-2023 is estimated at 5.1m sqf, equivalent to 1.3m sqf pa, which is 31% lower than the 10-year historical average of 1.88m sqf. Under current market conditions, we may also see many developers push back on some of their construction plans, which should help mitigate rental declines.

We expect office rents to come down by 5-10% in 2020

  • We expect office rents to come down by 5-10% in 2020 after a steady rise of nearly 28% since bottoming out in 2Q17. The impact of COVID-19 has yet to be felt on office rents with central business district (CBD) Grade-A rents remaining flat q-o-q at SGD10.09 psf in 1Q20, while Grade-B rents saw a modest 0.3% q-o-q decline, according to Colliers.
  • Leasing demand for 1Q20 was driven by the technology, media and telecommunications (TMT) as well as co-working space sectors, but is expected to slow down significantly in the remaining quarters. Overall vacancy for CBD Grade-A office space also tightened by 30bps q-o-q to 3.1%.

Lower expiring rents and government support measures alleviate some pressure on office REITs.

  • While the outlook for the office sector remains negative in the near term, the impact on office REITs is mitigated as expiring rents for office leases on average are 10- 20% below market rents as most of the expiring leases were signed before the current office market recovery in 2016-2017. This should allow landlords to lower rent and retain tenants.
  • Tenants may also choose to extend their leases in the same premises at lower rent rather than moving location and incurring additional costs unless a much cheaper alternative emerges. This, in our view, provides some downside protection.
  • Overall, we expect office landlords with minimal near-term lease expiries and assets at prime locations to be in a better position to weather this crisis.
  • Our pick is Suntec REIT (SGX:T82U) (BUY, Target Price: SGD1.78) on valuation and asset quality basis. See Suntec REIT Share Price; Suntec REIT Target Price; Suntec REIT Analyst Reports; Suntec REIT Dividend History; Suntec REIT Announcements; Suntec REIT Latest News.

Hospitality REITs – Awaiting positive signals

  • The hospitality sector has taken the most direct hit with global travel coming to an almost complete halt in 2Q. As Singapore does not have a domestic tourism market, visitor numbers for April dwindled to just 748 1.6m last year. Hotel occupancies stood at 41% for April while RevPAR declined 80% y-o-y, supported mainly by Stay At Home Notice (SHN) arrangements made by government authorities. While the near-term outlook remains bleak, the possible opening of green channels between various countries offers a glimmer of hope.

2Q DPU outlook.

  • Distributable income for the quarter is expected to be a bare minimum, only supported by hotel master lease rents and various government grants. Hospitality REITs with overseas assets have seen varying degrees of impact, with many remaining closed amidst poor demand. There is also a good possibility of net income losses for many overseas assets which do not have master lease rental support.

Possibility of supply being pushed further back.

  • Hotel supply remains minimal with a supply growth of 1% pa over the next three years, compared to c.4% pa during 2013-2018. With the possibility of the travel ban remaining in place for a longer period, we believe many hoteliers could also push back near-term supply. The majority of the upcoming supply is also tilted towards the upscale and luxury segments located in the city centre, which should pose less of a direct competition to the listed REITs portfolio.

Medium-to longer-term catalysts remain intact.

Retail REITS – Going through a challenging period

Sharp fall in retail sales and shop closures plague sector outlook.

  • Based on the latest official data, retail sales tumbled 41% y-o-y in April, deepening from a 13.3% decline in March, and is likely to fare worst for May. Retail sales have been on a declining trend since Jan 2019.The impact of circuit breaker measures is seen as taking a toll on the food & beverage (F&B) sector (F&B sector may see more closures), with more than 15 F&B operators announcing closures across the island. F&B operators are one of the key players in Singapore malls and typically account for 20-40% of mall NLA. In addition, major fashion retailers like Zara have also announced plans to close down 1,200 stores worldwide (Zara to close 1,200 stores), which should have a cascading impact on retail malls. Even before the pandemic, signs of strain on the retail segment were visible, with the exit of major retail tenants (ie SaSa and DFS), as well as the downsizing of Metro stores.

Minimal impact from new rental relief framework for SMEs; early opening of Phase 2 brings some cheers to shopping malls.

  • Based on the new rental relief framework (Rental Relief for SMEs) for SMEs, the Government will be offering up to two months of rental rebates for retail tenants in private properties via property tax rebates and cash grants, and landlords will be expected to match it – thereby offering up to four months of rent relief for SME tenants.
  • As most REITs have already announced plans to offer 1.5-3 months of rent relief to tenants prior to the proposed law, the incremental impact on bottomline is minimal.
  • On the positive side, the move will provide the much needed cash flow relief to retail landlords and prevent a sharp spike in vacancies. In addition, the earlier-than-expected opening of malls from Phase 2 of the CB period (19 Jun) has brought in some cheer for malls over the weekend, with crowds thronging many shopping malls across the island.

Limited oncoming supply.

  • Based on CBRE data, the supply pipeline is expected to fall sharply to an average of 0.22m sqf pa in 2020-2022. This is significantly lower than the 5- year historical average of 1.66m sqf.
  • By sub-markets, the outside central region (36%) and fringe areas (34.5%) will account for the bulk of future supply, with The Downtown Core, Orchard, and rest of the central sub-markets accounting for the remaining 8.2%, 10.3% and 11.0% of future supply.

Prefer deep value plays and suburban malls on dips.

See S-REITs peer comparison in PDF report attached below.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-06-23
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 3.000 SAME 3.000