Singapore REITs - RHB Invest 2020-09-28: Stay Defensive Amid Anticipated Volatility; OVERWEIGHT


Singapore REITs - Stay Defensive Amid Anticipated Volatility; OVERWEIGHT

  • Keep OVERWEIGHT; REITS to continue outperforming amidst increasing market volatility. Amidst heightening US-China trade tensions and the US elections in November, we expect higher near-term market volatility. This, coupled with abundant liquidity and low interest rates, should keep yield instruments like REITS in favour. While sector valuations are not cheap, we see choice value in small-mid cap REITS with good quality assets and sponsor backing.
  • Our Top Picks: Suntec REIT (SGX:T82U), Manulife US REIT (SGX:BTOU), and CDL Hospitality Trusts (SGX:J85).

Real estate market conditions have gradually improved

  • Post the gradual opening up of Singapore’s economy since early June, real estate market conditions have gradually improved – with economic indicators, such as manufacturing output, non-oil domestic exports (NODX), and retail sales showing good rebounds. Hence, market fears of REITS required to provide additional rental rebates and/or tenant defaults/deferments have largely abated.
  • Barring a second COVID-19 wave, we expect REITS to also distribute most of the additional retained income (on top of rent rebates) in 2H20. Overall we expect most REITS to report better 2H DPU vis-à-vis 1H.

Interest rates to stay low till 2023; retail investor resurgence.

  • In its September briefing, the US Federal Reserve signalled that the US interest rates were expected to stay near zero through at least 2023, to allow a post-pandemic economic recovery. Conversely, governments elsewhere have pumped in > USD10trn in stimulus packages (McKinsey & Co), which ensured liquidity and prompted investors to hunt for relatively safe yield instruments like REITS and other real estate investments.
  • The low interest rate (lack of attractive bank deposits) and COVID-19 lockdowns also led to a resurgence of retail investors here and globally. In 2020, such investors were net buyers of REITS with YTD net purchases of SGD452m, while institutional investors were net sellers at SGD34m. (see SGX Weekly Fund Flow by Sector)

Acquisitions picking up pace as anticipated; funding environment remains favourable.

  • Based on our estimates, S-REITS have announced SGD4.0bn in acquisition YTD, with an overall acquisition value in 2H20 of SGD2.7bn double that of 1H20. This does not come as a surprise. We expect this trend to continue as market conditions stabilise post COVID-19 while borrowing costs have fallen considerably (50- 100bps), resulting in a more-favourable acquisition environment.
  • Among sub-sectors, industrial and office sector REITS are likely to form the bulk of such acquisitions due to favourable trading yields and bank financing.

Perpetual securities back in favour; green and sustainable financing gaining prominence.

  • Ascendas REIT (SGX:A17U) and Keppel REIT (SGX:K71U) are expected to redeem their perpetual securities which are due for their first call in October/November with REITs recently issuing new perpetual securities on the back of a renewed market appetite. The funding cost of new perpetual securities has fallen by c.150bps indicating a return in market appetite for good quality names.
  • AIMS APAC REIT (SGX:O5RU) has also issued new SGD125m 5-year perpetual securities in August at reasonably attractive rates of 5.65% pa. Recall that earlier Ascott Residence Trust (SGX:HMN) has announced non-call of its perpetual securities in May. Another key emerging trend in REITS/real estate financing is green and sustainable financing loans secured on the back of REITS’ sustainable initiatives which typically result in a 20-30bps additional savings in interest costs.
  • See Fig1 in PDF report attached below for summary of SREITS perpetual securities issuance.

REITS trading near mean levels; mid-cap space offers more upside potential.

  • SREITS currently trade at a P/BV of 1.1x and offer average yields of 5.1% (410bps higher than the 10-year government bond) – this is closer to long-term mean levels. While the headline valuations do not look cheap, we see selective opportunities in the REITS space, as there is a huge disparity in valuation among larger and small-and mid-cap REITS.

Asset valuations are unlikely to see double-digit declines.

  • Based on REITS that recently revalued their assets, as well as discussions with various REIT managers, we note that cap rates across asset classes have remained largely stable. This was on ultra-low interest rates, lack of comparable transactions, and limited fire sales.
  • Appraisers have, instead, factored in lower market rent and rental growth in light of COVID-19, which has resulted in an overall asset value decline of about 0-4%. With market conditions improving since June, we do not expect any significant declines (more than 5%) in asset values during the year-end valuation.

S-REITs Sector Outlook

  • Industrial REITs – on a recovery path.
  • Office REITs – strong demand growth expected from tech sector.
  • Hospitality REITs – awaiting a vaccine shot but positive green shoots emerging.
  • Retail REITs – Recovery from pent-up demand but mid-term outlook remains challenging.
  • See PDF report attached below for more details on each S-REITs sector.

Industrial REITS remains our preferred subsector

  • Industrial REITS remains our preferred subsector, as we see it as the most resilient in a post COVID-19 world. This is followed by office, hospitality, and retail REITS.
  • Hospitality REITS remain the wild card in our view, as we expect the sector to bounce back strongly once a vaccine is found.
  • Retail REITS remain our least preferred sector, as we believe the current crisis has accelerated structural headwinds.
  • See PDF report attached below for peer comparison and more S-REITs data tables.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-09-28
SGX Stock Analyst Report BUY MAINTAIN BUY 1.780 SAME 1.780