Singapore REITs Monthly - Phillip Securities 2020-11-23: Looking Beyond Near-term Weakness


Singapore REITs Monthly - Looking Beyond Near-term Weakness

  • FTSE S-REIT Index underperformed the STI and Real Estate Developer Index. See S-REITs share price performance. Hospitality segment was the best performer, up 16.0%, lifted by news of vaccine progress. Industrial segment fared the worst, down 2.2%.
  • Sector yield spread of 338bps over the benchmark 10-year SGS (10YSGS) was -0.1SD.
  • Remain OVERWEIGHT on SREITs with catalysts expected from acquisitions fuelled by the conducive interest rate environment. Sub-sector preferences are hospitality (upgraded), office and industrial.
  • Top picks are Manulife US REIT (SGX:BTOU), Frasers Centrepoint Trust (SGX:J69U) and Ascendas REIT (SGX:A17U).



  • As more workers return to the office, companies are able to evaluate their space needs. Several banks have announced flexible working arrangements, allowing their workforce to telecommute 40-60% of the time. DBS (SGX:D05)’s 29,000-strong workforce has the option to work remotely up to 40% of the time. About 65% of UOB (SGX:U11)’s 26,000-strong workforce has the option to work remotely two days a week. Financial institutions are the top three occupiers of office space and we think their move towards flexible work arrangements will set in motion more aggressive rightsizing of space in the mid-term.
  • REITS have reported a handful of pre-terminations, with tenants giving back 10-20% of their space. Encouragingly, part of the space vacated has been backfilled. QBE Insurance is relocating to Guoco Tower and taking up 31,000 sq ft of space vacated by Grab, which is moving to one-north. Amazon will lease 90,000 sq ft across three floors at Asia Square Tower 1 given up by Citigroup.
  • Construction slippages, as well as muted supply in the market, are expected to provide near-term support for the office sector. Supply in the core CBD is at its 5-year historical average of 0.9mn sq ft in comparison to 1.2mn sq ft during the GFC. So far, two CBD commercial owners are revaluating redevelopments to unlock additional GFA from the CDB and Strategic Development Incentive Schemes. About 700,000 sq ft from AXA Tower (50:50 JV between Perennial and Alibaba) and City Developments (SGX:C09)’s 353,575 sq ft Fuji Xerox Tower and 131K sq ft Central Mall will potentially be displaced in 2021/22, if plans for redevelopment proceed.


  • Industrial rents dipped 0.7-1.1% q-o-q across the asset classes while occupancy inched up 0.2ppt, lifted by factories (+0.2ppt) and business parks (+0.7ppt).
  • Logistics assets have benefited from expansion by e-commerce and third-party logistics players while demand for business parks has come from firms relocating to business parks with similar specs as Grade A offices to save costs. The moratorium on data centres remains firmly in place. This is expected to lead to higher rents in the coming years. Leasing of factory space may still be muted as global demand is only starting to recover. Demand for hi-tech space remains supported by growth in electronics demand.


  • Retail occupancy was steady q-o-q at 90.4% although rents showed weakness. Central rents tumbled by 6.4% q-o-q and 10.2% y-o-y while fringe rents dipped 1.4% q-o-q and 4.4% y-o-y. This is expected to continue as retail landlords prioritise occupancy over rents and exercise flexibility in lease negotiations. Landlords have offered shorter leases of six months to tenants who are still struggling. They are also offering 3-year leases with lower base rents and higher turnover rents in the first year, with the base rents escalating over the years. Such leases are expected to lower occupancy costs for tenants in the short term as the economy recovers.
  • The retail sales index (ex-motor vehicles) dipped 4.4ppts m-o-m from -8.3% to -12.7% in September. Online retail sales made up 11% of the sales. Supermarkets (+18.9%), Furniture & Household Equipment (+11.0%) and Recreational Goods (+6.1%) continued to grow y-o-y while other fashion-related discretionary trades contracted 15.9-37.9%.
  • The pandemic was the final nail in the coffin for ailing concepts such as department stores. In October, Robinsons announced its total exit from Singapore for good. It followed Top Shop’s decision to pull out of Singapore in September. In light of the weaker leasing demand, REITs are evaluating their asset-enhancement initiatives and repositioning of their malls.
  • Singapore may enter Phase 3 of reopening before the end of the year. Phase 3 will entail a further relaxation of control measures. The cap on group gatherings may be increased from five to eight people. Restrictions on nightlife hotspots, which are deemed higher-risk, such as bars, karaoke lounges and nightclubs are likely to remain. Retail landlords will likely provide some rental support for tenants which continue to operate under restrictions.


  • RevPARs have been climbing since hoteliers started to accept staycation bookings in July. Industry occupancy remained above 60% in 3Q20, recovering from its low of 40% in March and April. Hotels that are expected to draw staycation demand are luxury/upscale or resort-styled accommodations. With bans on leisure travel likely to remain in place as we enter the festive season, hoteliers are anticipating a spike in staycation demand. They have raised room rates by S$100-200.
  • China’s domestic air travel has recovered to pre-pandemic levels although international travel remains curtailed. Given that China is ahead in the COVID-19 timeline, we look at its recovery as a gauge for the other countries. Countries with sizeable domestic travel markets such as France, Japan, the US, Spain, India and Brazil could potentially see a similar recovery in domestic travel. Several vaccines have achieved success rates of over 90%. But for travel confidence to return, the vaccines must be available to all.
  • Meanwhile, cost initiatives by hoteliers have borne fruit. Cost and operating structures have become leaner through the adoption of digital technology. Hotels have lowered their manpower costs by enabling self-check-in using mobile devises and deploying service robots and mobile applications for reservations.


Maintain OVERWEIGHT on sector

  • Since June, economic indicators have been improving. These include manufacturing output, NODX and retail sales. SREITs share that most of their tenants remain current with their rents, although a handful are still in need of rental assistance.
  • News of high success rates of the Pfizer and Moderna vaccines has lifted sentiment, potentially benefitting hospitality REITs the most.

Sub-sector preferences: hospitality, office and industrial

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2020-11-23
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