Singapore REITs - DBS Research 2020-09-29: Insatiable Growth Appetite

FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU) ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) ASCOTT RESIDENCE TRUST (SGX:HMN)

Singapore REITs - Insatiable Growth Appetite

S-REITs recovery remains on track as fiscal support minimises earnings downside risk and boosts consumer spending.
Acquisition activity stirring to life; expect more purchases in industrial and office space in 4Q20-1H21.
Low interest rate environment sets the tone for further compression in yields of c.5.0% (vs. mean of 3.3%).
Expect to see a continued broadening rally in the S-REITs.

While in the midst of a gradual recovery, we are confident that an organic earnings recovery will start to filter through from 3Q20 on the back of green shoots emerging across most subsectors (except for hospitality where the recovery appears to be most nascent for now).
We think the government’s measures to boost firms’ liquidity and sustain jobs will minimise downside risks and provide a boost to overall consumer consumption in recent months. Even if the growth restart stutters, we believe that the government will intervene with timely fiscal support if need be.

Activity has been buzzing and as share price stabilises along with the negative impact of the COVID-19 pandemic on cashflows, we saw close to S$3.0bn in deals announced year-to-date, with the majority taking place in 3Q20. Supported by low interest rates and higher debt capacity with an enhanced MAS gearing limit of 50%, we see more activity happening in 4Q20-1H21.
Thanks to conducive cost of capital, we expect to see most activities within the industrial space, especially when logistics and data-centres are expected to see further compression in returns as demand for these assets spikes.
We believe that selected office S-REITs and hospitality S-REITs may consider to recycle their proceeds from past divestments to claw back their lost income.

The S-REITs trade at a FY21F yield of 6.1% (vs. the 10-year bond yield of 5.0%) that we believe will compress further given an extended period of low interest environment. We view acquisitions positively as they will complement a DPU recovery of c.13% in FY21 (FY20-22 CAGR of 8.0%, ex hospitality S-REITs) and maintain our view that investors should continue to broaden their investment. See report: Singapore REITs - DBS Research 2020-09-01: Turn Of The Tide.
Our picks are

While industrials are trading at tighter yields, we believe that larger-than-expected acquisitions may present upside to our estimates, thus sustaining valuations. See PDF report attached below for complete analysis.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2020-09-29

SGX Stock Analyst Report BUY MAINTAIN BUY 1.600 SAME 1.600

BUY MAINTAIN BUY 4.000 SAME 4.000

BUY MAINTAIN BUY 1.100 SAME 1.100