ARA LOGOS LOGISTICS TRUST (SGX:K2LU)
SOILBUILD BUSINESS SPACE REIT (SGX:SV3U)
KEPPEL REIT (SGX:K71U)
CAPITALAND COMMERCIAL TRUST (SGX:C61U)
FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU)
Singapore REITs - The Next Chapter; Broadening Rally In 2H20
- Broadening rally expected in 2H20 as investors’ confidence returns aided by “lower-for-longer” rates.
- Employing a rotational strategy amongst the industrial S-REITs to capture alpha.
- Commercial properties with dominant characteristics set to ride past structural headwinds.
- Acquisition momentum to fuel next leg up.
Broadening S-REIT rally as economy remains on the mend.
- With various landlords and government incentives rolling off in the coming months, we expect the economy to deteriorate first, before recovering gradually. That said, we have noted a broadening of the S-REIT rally as investors position ahead of a recovery. The next data-point we see boosting investors’ confidence is the phased return of office workers to CBD, which will boost office and selected retail S-REITs.
- Per our report, Singapore Office REITs - DBS Research 2020-06-08: Grab It While It Lasts, investors should focus on the positive implications of a possible supply crunch in 2H20-2020 rather than structural demand changes which will unravel over 3-5 years. Over time, we see resilience in being positioned in Grade A office (Keppel REIT (SGX:K71U), CapitaLand Commercial Trust (SGX:C61U)) and decentralised office space (Mapletree Commercial Trust (SGX:N2IU)).
- In the retail space, we maintain our preference for the suburban over tourist-focused malls as discretionary spending will likely remain subdued amidst the weak economic outlook as per report: Singapore Retail REITs - DBS Research 2020-05-29: Near The End Of A Storm. We see value in the retail landlords CapitaLand Mall Trust (SGX:C38U) and Frasers Centrepoint Trust (SGX:J69U) to play catch-up given prices are 16-20% below that at start of 2020.
A differentiated strategy in the industrial S-REITs to capture alpha.
- Amongst the top performers YTD, we continue to like the industrial S-REITs aided by structural tailwinds (riding on greater adoption of e-commerce and office decentralisation trends). We however employ a differentiated strategy, with a focus on Ascendas REIT (SGX:A17U) and Frasers Logistics & Commercial Trust (SGX:BUOU) which we believe will play catch-up given their higher absolute yields of 5.0% and 6.5% respectively.
- We also see a yield compression in the mid-cap industrial S-REITs (see report: Singapore Industrial S-REITs - DBS Research 2020-06-25: Making Up Lost Ground) as economic recovery gathers pace in the medium term. We like ARA LOGOS Logistics Trust (SGX:K2LU) and Soilbuild REIT (SGX:SV3U) for their quality portfolio and value-accretive pipeline of assets.
Broadening rally in 2H20
A liquidity driven but broadening rally in recent months.
- While the strong liquidity have boosted share prices and brought the S-REITs Index (FSTREI Index) to c.11% of its peak in 2020 (vs - 20% for the Straits Times Index [STI]), we note that the industrial S-REIT (-7.1% year-to-date [YTD]) sector remains the key relative outperformer given its relative resilient earnings followed by healthcare S-REITs (-13.2%), and office S-REITs (- 16.4% YTD).
- The subsectors that have been materially affected by the COVID-19 pandemic, namely the retail (-22.5% YTD) and hospitality S-REITs (-21.3% YTD) remain more than 20% below their prices at the start of the year.
- We do, however, note a broadening rally seen in the S-REITs in recent months, buoyed by increasing positive data-points as the economy reopens progressively. We also observed that the retail S-REITs have been relative outperformers in the months of May’20 and Jun’20, overtaking the performance of Industrial S-REITs. The gradual loosening of restrictions, allowing retailers to restart operations (even cinemas from 13 July 2020) is positive for retail landlords, implying lower need for further rental reliefs going forward.
- See S-REITs Share Price Performance.
Broadening rally to continue into 2H20.
- Looking ahead, we believe that the continued phased reopening of the economy will result in more confidence seeping back into the sector. While industrial subsectors will likely remain the core sector amongst investors, we see the following trends emerging
- broadening of the rally seen in the S-REITs to the other subsectors of office and retail S-REITs,
- closing of the mid-cap and large-cap valuations within the industrial space, and
- the return in the pace of accretive acquisitions, driving upside to valuations for the S-REITs.
- With most of the other S-REIT subsectors trading between their 10-year -0.5 and -1 standard deviation (SD), we see the ability to revert to historical mean as the economy recovers.
Navigating the real economic test
New way of commuting; faster adoption of e-commerce trends are expected post COVID-19.
- With various landlords and the government incentives in the coming months, the crux is if companies (tenants, retailers) can get back up on their own two feet post disruption brought about by the COVID-19 pandemic. We expect changes in workers’ commuting, leisure, working and lifestyle preferences in the future, which will have an impact on how investors allocate capital to the various sectors over time.
- At the top of everyone’s minds is how potential changes to the way workers commute to work (or telecommute) consume and travel will have an impact on the future landscape for the various real estate classes going forward.
Industrial S-REITs (positive in near term/ positive in medium term).
- Notwithstanding the best-performing subsector YTD, we remain firm believers in the industrial S-REIT subsector that will emerge stronger post COVID-19, buoyed by the acceleration of structural growth trends. While assistance rendered to tenants is likely to be expensed by landlords in the upcoming results in 2QCY20, the impact across the sector remains manageable at c.3%-5% of revenues.
Focusing on COVID-19-resilient exposures.
- The COVID-19 pandemic has brought forth some structural changes in the economy and led to acceleration of certain trends. The widespread outbreak has made the biomedical and healthcare sector more crucial than before. The continued drive to digitalise the economy will boost the technology and infocomm sector, and the rise of e-commerce should benefit the logistics and distribution sector. We believe that the consumer goods sector will continue to be a mainstay and stay relatively stable, and so will the government sector and non-profit organisations.
- However, the depressed oil prices and projected economic slowdown will pose a challenge for those in the oil and gas, commodity and marine sectors. Lockdowns of nations to curb the spread of COVID-19 have weighed negatively on international travel and tourism, and put pressure on the aerospace sector.
- We compared the exposure of industrial REITs to tenants in the various sectors and noticed that the exposure among the large-cap and mid-cap REITs are actually very similar. The proportions of their exposures to the fast-growing sectors and declining sectors are on par.
- It may be too generic to access each REIT’s earning risks according to tenant industry as there will be winners and losers in every sector. However, we believe that this gives us a very good sense of their tenant diversification. Among them, a large-cap industrial REIT and Mapletree Industrial Trust (SGX:ME8U) have the highest exposures to the commodity, marine and aerospace industries, accounting for c.21% and c.10% of their tenants respectively. This is further highlighted in report: Singapore Industrial S-REITs - DBS Research 2020-06-25: Making Up Lost Ground.
- See also report: Singapore Industrial REITs - DBS Research 2020-06-02: Industrial Sector – Reaching Former Highs
Office S-REITs – the jury is still out (negative in near term/ positive in medium term).
- We keep an eye out on potential shifts in occupier demand as firms embrace flexible working arrangements for their employees, as the impact on office demand in the central business district (CBD) will only unravel in the longer term.
- The near-term office outlook remains stable, buoyed by the lack of upcoming supply over 2020-2022, thereby supporting office S-REITs portfolio occupancies. Coupled with ample spreads between expiring and market transaction levels, we believe that downside risks for office REITs are likely to be manageable.
- We believe it is too early to turn cautious on potential structural demand shifts with the adoption of work-from-home (“WFH”) practices. While flexible working policies will be core, we do not see a 180-degree pivot towards WFH but a balance will be sought. In fact, we see Office S-REITs upping the game by offering flexible workspaces to meet their tenants’ evolving needs and integrating with sustainability practices.
- Near-term supporting factors are
- demand for space due to safe distancing requirements and
- Business Continuity Plan (BCP) needs.
- We expect two trends in the medium term as follows:
- the premium grade A office space continue holding its ground, and
- acceleration in the decentralised office space.
- See report: Singapore Office REITs - DBS Research 2020-06-08: Grab It While It Lasts.
- See also: US Office S-REITs - DBS Research 2020-06-23: Avengers! Assemble!
Retail S-REITs (negative in near term/ positive in medium term).
- While we are into phase 2 of the reopening of the economy post Circuit Breaker, the worst is over for retail S-REITs, which had to provide the highest amount of tenant assistance to their retailers. That said, since reopening, we are seeing positive signs emerging with sales momentum (especially in the food & beverage sector) approaching pre-COVID-19 levels.
- That said, the strong adoption post COVID-19 of online shopping and food delivery will drive more sales online. Landlords will have to remain proactive to continue to attract consumers to come to the malls to spend. Meanwhile, vacancy rates are expected to increase modestly across most portfolios.
- See report:
- See also: Singapore Retail REITs - DBS Research 2020-06-17: Shopping Starts This Weekend!
Hotels S-REITs (negative in near term/ positive in medium term).
- The hotel sector will be the last to recover as we do not expect international travellers to come to Singapore anytime soon (earliest 2021). The recovery will be tepid if any, and the hospitality REITs will depend on their sponsors for rental income this year.
- Given the strong sponsor backing and the reopening of the Singapore tourism sector to staycations from 3 July 2020 onwards, we do not anticipate further downside risk for 2020 numbers. Assuming that the travel industry returns to normalcy in 2021, this sector will thus rebound the strongest.
- See also report: Singapore Hospitality - DBS Research 2020-07-07: Vacations (Staycations) – Here We Come!
Returning to the virtuous acquisition growth cycle
Acquisitions to occur in 2H2020
- Returning to the virtuous acquisition growth cycle. S-REITs are trading at 1.15x P/NAV and FY20/21F yields of 5.5%/6.3%, implying a growth rate of c.15%. Spreads are attractive to remain vested and while growth in 2021 is at a robust 80bps (or 15%) owing to one-offs in 2020, we see upside upon a resumption of acquisition activities in 2H20. See S-REITs' valuation ranges and historical P/NAV in PDF report attached below.
- We see possibilities in selected S-REITs in the industrial and retail subsectors positioned to leverage on their sponsors’ pipeline and support growth distributions.
- See also the summary table of S-REITs acquisition pipelines from Sponsors like CapitaLand (SGX:C31), City Developments (SGX:C09), Frasers Property (SGX:TQ5) and Mapletree Investments in the PDF report attached below.
- See also recent reports:
- Mapletree Industrial Trust - DBS Research 2020-07-01: Reaching For The Stars; Growing Datacenter Focus.
- Frasers Centrepoint Trust - DBS Research 2020-07-02: Spotlight On PGIM Acquisition.
- CapitaLand Mall Trust - DBS Research 2020-07-07: Jumping On The Bandwagon; Returning Office Crowds A Boost To Central Malls
Derek TAN
DBS Group Research
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Rachel TAN
DBS Research
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Dale LAI
DBS Research
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https://www.dbsvickers.com/
2020-07-07
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Analyst Report
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