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S-REIT Picks for 2021 - DBS Research 2020-12-11: Ride The Winds Of Change; Time To Venture Out

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S-REIT Picks for 2021 - Ride The Winds Of Change; Time To Venture Out

  • Bulk of income disruption to be confined to 2020 as economy mends.
  • Close to 60% of S-REITs projected to deliver above pre-COVID distributions, supporting a further rally.
  • Yield spreads at more than 1SD provides sufficient buffer against a steepening yield curve.
  • Balanced approach in our picks; focus on names with sustainable growth and pipelines.



Leaving the pandemic behind


Singapore economy expected to be out of the woods in 2021.

  • The Singapore economy is expected to be one of the fastest growing economies in Asia in 2021 with DBS economists forecasting Singapore’s gross domestic product (GDP) to grow by c.5.5%, one of the fastest growth rates amongst Asia Pacific economies. This cyclical upturn is based on expectations of a gradual bottoming out of the manufacturing and services sector as business activities dial up post COVID-19.
  • That said, the economy is expected to only return back to pre-COVID levels by the end of 2022.
  • Nevertheless, we believe that the strong growth rates in 2021 are reasons for cheer and should be read positively for S-REITs.

Accelerating growth profile in 2021; projected 2-year DPU CAGR of 11.0%.

  • Income disruption due to the COVID-19 pandemic in 2020 has been unprecedented. However, given the coordinated support (liquidity injection and rental rebates) offered by both government and landlords to most businesses and tenants, we believe that most of this income disruption should be confined within 2020.
  • While growth momentum in 2021 may be dialed down due to new demand trends emerging post-COVID, we expect better times for most firms and landlords.
  • We do not anticipate landlords to provide similar amount of rental assistance (mainly in retail, commercial and industrial sectors) and target more towards a smaller proportion of income (and tenants) going forward. As such, with minimising income risk as Singapore’s economy mends, coupled with active acquisition activities in 2020, we project a robust c.13.5% rise in DPUs (ex-hospitality S-REITs) on a y-o-y basis. Including the hospitality S-REITs, overall sector growth is projected at c.18.5% for FY21.
  • With investors increasing focus towards the S-REITs ability to grow at a sustainable rate, we foresee a more sustainable growth rate of c.6.6% (c.3.3% ex-hospitality S-REITs) in FY22 which implies a 2-year CAGR of c.11% (c.8.0% growth on an ex-hospitality S-REITs basis).

Monitoring potential “cliff effect” in 1Q21; government ready to provide fiscal support if required.

  • Fiscal support measures introduced by the government during the COVID-19 pandemic have helped stave off the risk of systemic business closures and job losses in Singapore, safeguarding stability in the financial system. These fiscal support measures will largely be withdrawn gradually and expected to drop by the first quarter of 2021.
  • The main worry is if firms can continue to operate without these support measures in a more subdued demand environment. We believe that depending on the economic recovery, further help may be required, especially for firms within the aviation and tourism sectors which are dependent on borders re-opening.

Responding to COVID-19.

  • The COVID-19 pandemic has been a reset button and a great leveller. Apart from disrupting our day-to-day routine, it has caused businesses to explore and respond to new norms post-COVID. Traditional industries such as real estate have not been excluded in the paradigm shift. We believe that circular trends emerging post-pandemic such as a permanent shift towards online shopping and flexible working arrangements are key trends that will have an impact on future consumption and working patterns, as well as demand for real estate.
  • While upcoming supply should generally taper off from 2021 onwards in most real estate sectors (except for industrial sector), demand for real estate space is expected to change, especially in the interim.
  • That said, we see support from low passing (or expiring) rents in 2020 across most sectors lower compared to current rent levels. Landlords remain on a charm offensive to keep occupancy levels stable.


Earnings returning to pre-COVID levels


Focus on occupancy rates as landlords remain defensive amid nascent economic growth.

  • Supported by a further easing in supply pressures, we see lower downside risks across most sectors translating to a more stable operating environment.
  • We expect reversions to be flattish or marginally positive, supported by widening leasing spreads (passing rents < spot rents) giving landlords ample buffers to keep net operating incomes (NOIs) stable and not pushing the envelopes on the rent front. This is expected to result in resilient occupancy rates which will be key in 2021.

Retail and Office S-REITs to see strong rebound in earnings; but DPUs marginally ahead of pre-COVID levels.

  • The retail S-REITs have been hit in 2020 due to rental rebates which we believe to be one-off with additional assistance to be more targeted in 2021. We see continued retailer consolidation activities in 2021 with the dominant malls at key transport nodes continuing to exhibit resilience. Our report:
  • The office S-REITs are projected to deliver better performance brought about by acquisitions and tapering off in rental rebates. That said, with more companies adopting flexible working arrangements on improved productivity aided by technology, we see potential shadow space returning to the market looking for tenants. Our report:

Hotels REITs – return of the “dark horse” in 2021.


Industrial – focus on logistics S-REITs.

  • The industrial S-REITs sector will enter an oversupply situation in 2021, which will be an overhang on organic growth prospects across the sector. We believe that logistics S-REITs can deliver strong growth, potential tapping into the vaccine delivery network which will drive demand over next few years. Our report:

Returning to pre-COVID levels.

  • Apart from focusing on growth rates, we believe that it is also important to assess if DPUs return to pre-COVID levels as the sector navigates past the crisis. While the strength in organic growth outlook dims as we dial down our rental reversion expectations and lower occupancy assumptions over 2021-2022 across most subsectors, accretive acquisition activities in 2020 have buffered some of these weaknesses.
  • Overall, we are comforted by the fact that based on our estimates, 60% of our S-REITs under our coverage are projected to deliver DPUs in 2021 that are higher than 2019 (pre-COVID levels). This reinforces our confidence that S-REIT’s ability to recover to previous share price highs is well supported by fundamentals.


Navigating past the gradual steepening of yield curve


Low interest rates remain a boon for S-REITs.

  • DBS Bank economists believe that the US Federal reserve (Fed) will likely hold interest rates at record lows until 2023 to stimulate economic growth post-COVID-19. In our view, this policy remains accommodative and is positive for to maintain valuations for S-REITs.
  • That said, while keeping the shorter end of the interest rate anchored at low levels, the yield curve (measured as the difference between the 2-year government bond yield and the 10-year government bond yield) is expected to steepen in 2021-2022 as the longer end of the interest rate curve rises in response to stronger economic growth prospects coupled with inflation creeping higher.
  • DBS economists are projecting a 50bps steepening in the US yield curve from the current 75 bps (as of 4Q20) to 125 bps by end 2022. For Singapore, given the close correlation in interest rates movement between the US and Singapore, we expect the yield curve to steepen by 25 bps from the current 75 bps (as of 4Q20) to 95 bps (as of end 2022).

Gradual steepening of the yield curve not likely to have a significant negative impact on S-REIT prices.

  • We note that there has been negative correlation between a steepening yield curve and S-REIT share price. We believe that this is unlikely to be the case for the S-REITs in 2021 given;
    1. gradual nature of the yield curve steepening supported by stronger economic and DPU growth prospects and,
    2. yield spreads in excess of 5.0%, which is close to its – 1SD levels, supporting further inflows into the sector in 2021.

All clear for S-REITs to reach former heights with yield curve remaining flattish in the medium term coupled with a macro turnaround.

  • The S-REITs trade at a FY21F yield of 6.0% or a yield spread of 5.0% (vs. the 10-year bond yield of c.1.0%) that we believe will compress further given an extended period of low interest rates.
  • We view acquisitions positively as they will complement a DPU recovery of c.13% in FY21 (FY20-22 CAGR of 8.0%, excluding hospitality S-REITs) and maintain our view that investors should continue to broaden their investments within the space to include office, retail and even some beaten down hospitality S-REITs.


Our Picks: Time to venture out


Valuation disparity has narrowed, time to pick your winners.

  • We maintain our stance as per our report Singapore REITs - DBS Research 2020-09-01: Turn Of The Tide, and believe that the expected economic recovery in 2021 increases confidence that downside risks to earnings will likely dissipate.
  • We believe that it pays for investors to continue allocating capital from the resilient subsectors within the industrial S-REITs to the pandemic hit sectors selectively. Winners like retail, office and hospitality S-REITs are likely to continue in 1H21. We saw this strategy unfolding in 4Q20 and believe that news of various vaccines entering production in early 2021 should drive continued compression in this relative performance.
  • With the valuation disparity between the COVID-19 resilient sectors of industrial/healthcare and the pandemic hit sectors of retail, office and hospitality narrowing from 0.75x (from our last update) to 0.88x, we believe that investors should start to stock-pick winners ahead .

Our S-REIT Picks for 2021.

Recent reports on our 2021 S-REIT Picks:



More analysis on Singapore REITs sector:






Derek TAN DBS Group Research | Rachel TAN DBS Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2020-12-11
SGX Stock Analyst Report BUY MAINTAIN BUY 2.500 SAME 2.500
BUY MAINTAIN BUY 1.700 SAME 1.700
BUY MAINTAIN BUY 1.400 SAME 1.400
BUY MAINTAIN BUY 1.200 SAME 1.200
BUY MAINTAIN BUY 1.400 SAME 1.400
BUY MAINTAIN BUY 3.000 SAME 3.000
BUY MAINTAIN BUY 1.850 SAME 1.850
BUY MAINTAIN BUY 0.900 SAME 0.900
BUY MAINTAIN BUY 2.250 SAME 2.250
BUY MAINTAIN BUY 2.350 SAME 2.350


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