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Singapore REITs - OCBC Investment 2020-08-21: Glass Half Empty Or Full?

Singapore REITs - OCBC Investment Research | SGinvestors.io FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU) MANULIFE US REIT (SGX:BTOU) MAPLETREE NORTH ASIA COMM TR (SGX:RW0U) CAPITALAND MALL TRUST (SGX:C38U) ESR-REIT (SGX:J91U)

Singapore REITs - Glass Half Empty Or Full?




Unprecedented stimulus measures likely to keep interest rates lower for longer and hunger for yield strong

  • Given the widespread impact of the COVID-19 pandemic, central banks around the globe have fired bazookas of fiscal and monetary stimulus to tackle the negative ramifications on the economy.
  • In the US, the Fed has guided that they expect to keep interest rates at current near-zero levels until at least end-2022. However, given that the path to recovery continues to be fraught with uncertainties, we expect the Fed to keep rates at near zero for up to the next five years, while also maintaining a flexible stance towards asset purchases so as to ensure that rates at the long end of the US Treasury yield curve remain low. We expect this lower for longer interest rate environment to continue to drive demand for good quality yield instruments such as selective S-REITs. This hunt for yield theme has already resulted in the yield compression of the S-REITs sector.
  • On an absolute basis, the FTSE Straits Time REIT Index (FSTREI) is currently trading at a blended forward distribution yield of 5.5%, which is 1.4 standard deviations (s.d.) below its 10-year mean (6.2%). However, we would also have to take into account the sharp compression in sovereign bond yields.
  • Given that the Singapore government 10-year bond yield has declined 114 bps since the start of 2019, the current forward yield spread now stands at 457 bps. This is 0.7 s.d. above the 10-year average of 416 bps. Hence, on a relative basis, we opine that valuations of S-REITs are undemanding.
  • We believe the worst is over after a difficult 1H20, and are OVERWEIGHT the sector, although we remain cognisant on the uncertainties ahead.


Prudent capital management coupled with regulatory oversight

  • One foreseeable market risk in a low interest rate environment is the potential for excessive risk-taking action by corporates. We believe this is less of an issue for S-REITs given that there is a regulatory gearing limit of 50% imposed by the Monetary Authority of Singapore (MAS). While this has been raised from 45% with effect from 16 Apr 2020, MAS has sought to instil some balance with the planned implementation of a new interest coverage ratio (ICR) requirement, although this has been deferred to 1 Jan 2022 in light of cashflow constraints caused by COVID-19.
  • Some other key REIT markets such as US, Australia and Japan do not impose any leverage limit. The UK also has no leverage limit but requires REITs to maintain a minimum ICR of 1.25x. Despite a higher leverage limit allowed, we expect S-REITs to remain prudent in their capital management given lessons learnt from the last Global Financial Crisis.
  • S-REITs currently have an aggregate leverage ratio of 36.7%, which not only provides a healthy buffer to the regulatory limit, but there is also ample debt headroom to pursue inorganic growth opportunities.


Ample dry powder and liquidity in the markets

  • YTD, S-REITs and business trusts have announced only S$0.7b of equity fund raising in the secondary markets (excluding IPOs), which is lacklustre as compared to the S$6.4b raised in 2019. This is not surprising, given the pullback in share prices (YTD trough of FSTREI was -34.8% on 23 Mar), and difficulty in carrying out due diligence on potential acquisition targets due to global lockdowns being imposed.
  • The lack of equity fund raising activities is by no means a reflection of poor liquidity in the market, in our view. In fact, if we draw reference from data from Preqin, there is US$319b of dry powder which can potentially be deployed to the private real estate market. We believe this has two broad implications for the S-REITs sector.
    • Firstly, the ample liquidity may provide some support to asset values.
    • Secondly, this dry powder also means more competition for real estate assets and thus it might not be easy for S-REITs to find a good bargain.
  • In this regard, we believe S-REITs with strong sponsor pipelines would be able to stand out on inorganic growth opportunities.


S-REITs sector outlook: Glass half empty or full?

  • The impact of the COVID-19 pandemic on earnings and hence distributions to unitholders was apparent for all to see, as S-REITs under our coverage reported a 27.8% y-o-y dip in their DPU for the 2Q/1H CY20 earnings period (but -16.0% on a market cap weighted basis). All major sub-sectors with the exception of data centres recorded negative growth, with the worst performing being unsurprisingly the hospitality sub-sector (-61.8% y-o-y), followed by retail (-45.1%), office (-20.0%) and industrial (-13.5%).
  • We have reviewed our forecasts post 1H20 results. Our revised projections for the current financial year (FY20/21F depending on financial year end) now point to a 10.1% decline in DPU on a market cap weighted basis. However, we expect to see a recovery by 15.4% in the next financial year (FY21/22F), in-line with expectations of an economic rebound.
  • We generally believe investors can view the glass as half full for the S-REITs sector over the medium-to-long-term horizon, but recognise the fact that there is still a myriad of near-term uncertainties as businesses and individuals adapt to the new norm and it would also take some effort and good luck for the water to reach the brim again.


S-REITs sector positioning and top picks


See PDF report attached below for complete analysis and also summary of S-REITs 2Q/1HCY20 performance.






OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-08-21
SGX Stock Analyst Report BUY MAINTAIN BUY 1.590 SAME 1.590
BUY MAINTAIN BUY 0.840 SAME 0.840
BUY MAINTAIN BUY 1.090 SAME 1.090
BUY MAINTAIN BUY 2.29 SAME 2.29
BUY MAINTAIN BUY 0.450 SAME 0.450


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