CAPITALAND MALL TRUST (SGX:C38U)
FRASERS CENTREPOINT TRUST (SGX:J69U)
FAR EAST HOSPITALITY TRUST (SGX:Q5T)
KEPPEL REIT (SGX:K71U)
ELITE COMMERCIAL REIT (SGX:MXNU)
S-REITs Bi-Weekly - Elite Commercial Reit The Beneficiary Of Negative Interest Rate Review
- S-REITs corrected 3% across 16-30 Sep 20. S-REITs continued to announce yield-accretive acquisitions with Mapletree Industrial Trust following in the footsteps of Frasers Centrepoint Trust and Keppel REIT.
- The BOE confirmed that negative interest rates are under “active review” and could be deployed to support the British economy should the unwelcome scenario of a no-deal Brexit materialise. Key beneficiary: Elite Commercial REIT (SGX:MXNU).
- Maintain OVERWEIGHT.
- BUY
- CapitaLand Mall Trust (SGX:C38U) (Target Price: S$2.55),
- Frasers Centrepoint Trust (SGX:J69U) (Target Price: S$3.10),
- Far East Hospitality Trust (SGX:Q5T) (Target Price: S$0.72) and
- Keppel REIT (SGX:K71U) (Target Price: S$1.40).
UOBKH S-REIT Index corrected 3% to 244.8 over the past two weeks (16-30 Sep 20)
- The flurry of M&A activities continued with Mapletree Industrial Trust (SGX:ME8U) acquiring a data centre and office in Virginia in the US for US$200.6m-262.1m, subject to calibration of terms. The property is fully leased to one multi-national company on a triple net basis with a balance lease term of more than five years.
- Mapletree Industrial Trust's AUM will increase 4.5% to S$6.9b. Data centres will expand from 38.5% to 41% of AUM. Freehold properties will increase from 51.8% to 55.9%. Management disclosed that the deal is accretive to DPU even if priced at the higher end of the range.
Top outperformers.
- There were no clear factors affecting S-REITs. The broader stock market has been fixated on the upcoming US presidential elections and the resurgence of COVID-19 infections in Europe. Frasers Logistics & Commercial Trust (SGX:BUOU), Cromwell Europen REIT (SGX:CNNU) and Lendlease Global Commercial REIT (SGX:JYEU) gained 2.2%, 2.1% and 1.5% respectively.
Top underperformers.
- First REIT (SGX:AW9U) dropped another 13.9% after the initial rebound fizzled out. Investors remain concerned that First REIT has granted rental relief to Lippo Karawaci.
- Frasers Centrepoint Trust (SGX:J69U) lost 9.8% after completing a private placement of 244.7m new units at S$2.35 each.
- US REITs - ARA LOGOS Logistics Trust (SGX:K2LU) and Manulife US REIT (SGX:BTOU) - dropped 6.2% and 5.7% respectively.
- See
SPOTLIGHT – BOE MIGHT ADOPT NEGATIVE INTEREST RATES
BOE has changed its mind on negative interest rates.
- Andrew Bailey, governor of the Bank of England (BOE), first confirmed that negative interest rates are under “active review” during questioning by MPs at the House of Commons select committee on 20 May 20. Since then, the BOE has stressed that negative interest rates are part of its toolbox although there is no plan to use them yet. This is a departure from the BOE’s previous stance that it is not planning or contemplating negative interest rates.
Negative interest rates found an ardent supporter.
- Professor Silvana Tenreyno, an External Member of the Monetary Policy Committee (MPC), has thrown her weight behind an early adoption of negative interest rates. Negative interest rates provide greater incentive for companies and households to borrow and spend.
- A wide-ranging review by the BOE has shown that banks could adapt and prosper in an environment of negative interest rates because they boost economic activities and loan growth, and increase asset prices while reducing provisions for loan losses. There is also evidence of full pass through of negative interest rates to lower lending rates in most countries.
British economy battling two severe headwinds.
- There is a resurgence of COVID-19 infections in the UK. At the same time, the unemployment rate is expected to spike when the government’s furlough scheme expires in Oct 20. The BOE forecasts the unemployment rate will almost double to 7.5% by end-20. There have been complaints that the economy is recovering too slowly.
- Several MPC members have been pushing for the adoption of negative interest rates to accelerate the still-sluggish economic recovery.
Putting contingency plan in place.
- The BOE will commence “structured engagement” with bank regulator Prudential Regulation Authority from October to December on “operational considerations” to effectively implement negative interest rates. The BOE currently maintains its key interest rate at 0.1% and has an active asset purchase programme (quantitative easing).
- We believe the BOE will implement negative interest rates to support the British economy should the unwelcome scenario of a no-deal Brexit materialise.
Bond yield has already gone negative.
- The 5-year British gilts are currently trading at yield of -0.06%, indicating expectations that the BOE will adopt negative interest rates soon.
Elite Commercial REIT (SGX:MXNU) (BUY/ Target Price: £0.88)
- Elite Commercial REIT (SGX:MXNU) benefits from the BOE adopting negative interest rates due to:
- lower cost of debt;
- negative interest rates tend to provide a boost to real estate prices; and
- wider yield spread, which attracts more yield-centric investors.
DWP steps up hiring of work coaches.
- Elite Commercial REIT’s primary tenant, the Department for Work and Pensions (DWP), is actively hiring more staff. The UK government currently employs 13,000 “work coaches” at JobCentre Plus, offering vital retraining skills to people looking for opportunities to start a new career. The DWP plans to have 4,500 more work coaches by Oct 20 and a further 9,000 by Mar 21.
- There is increased demand for additional floor space due to the increase in the number of work coaches employed. The DWP plans to double the number of work coaches country-wide to 27,000.
Jobcentre Plus stays open despite COVID-19 pandemic.
- JobCentre Plus remains open for claimants to meet face-to-face safely with their work coaches whenever necessary, although some DWP activities can be conducted online. During the previous lockdown in the UK, Elite Commercial REIT’s Jobcentre Plus locations remained open to process and disburse benefits to claimants, even though medical assessments, interviews or other face-to-face appointments were discouraged.
DWP is integral to social fabric in the UK.
- The DWP is the largest public service department in the UK and is responsible for crucial welfare, pension and child maintenance services. It is a ministerial department with a workforce of 77,000 full-time staff and serves about 20m claimants (one-third of the UK’s population). Total benefit spent for FY18/19 was £182.5b. The DWP plays a crucial role in the social infrastructure serving the UK’s local communities.
Stable cash flow backed by UK sovereign credit.
- Elite Commercial REIT has received in advance 99.8% of the 3-month rent for Jul-Sep 20 within seven days of the due date in Jun 20.
Maintain BUY.
- See Elite Commercial REIT Share Price; Elite Commercial REIT Target Price; Elite Commercial REIT Analyst Reports; Elite Commercial REIT Dividend History; Elite Commercial REIT Announcements; Elite Commercial REIT Latest News.
- Elite Commercial REIT provides 2020F distribution yield of 7.5%. Yield spread is attractive at 7.3% above 10-year British gilts of 0.2%. Our target price of £0.88 is based on DDM (COE: 6.5%, terminal growth: 1.0%).
Jonathan Koh CFA
UOB Kay Hian Research
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Loke Peihao
UOB Kay Hian
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Nicola Ho
UOB Kay Hian
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https://research.uobkayhian.com/
2020-10-02
SGX Stock
Analyst Report
2.550
SAME
2.550
3.100
SAME
3.100
0.72
SAME
0.72
1.300
SAME
1.300
0.880
SAME
0.880
