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Navigating Asia Property - CGS-CIMB Research 2020-12-16: Playing Catch Up

Navigating Asia Property - CGS-CIMB Research | SGinvestors.io CAPITALAND LIMITED (SGX:C31) CITY DEVELOPMENTS LIMITED (SGX:C09) FRASERS CENTREPOINT TRUST (SGX:J69U) FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU)

Navigating Asia Property - Playing Catch Up

  • We are Overweight on the Asia property sector on reflation prospects due to synchronised global economic recovery, with tailwinds of low interest rates and expansionary fiscal policies.
  • We think the sector’s average FY21F valuations of 0.74x P/BV, FY20-22F EPS CAGR of 12.7% and P/E to FY20-22F growth of 0.61x have not priced in the growth outlook.
  • Two themes to play into this recovery:
    • We like Indonesia and Vietnam residential sectors. Economic recovery and the spate of beneficial policies aimed at both end-buyers and developers should signal an inflexion point in Indonesia property sector. Sustained high GDP growth and easing of supply constraints will continue to underpin the Vietnam residential property sector through wealth creation and home ownership aspirations.
    • We also like the Thailand, Vietnam and Malaysia industrial names, which are benefiting from tailwinds of accelerated e-commerce and ‘China + 1’ strategy.



Singapore Property Sector At A Glance

  • Developers and REITs have underperformed the broader Singapore year-to-date. 2020 has turned out to be a watershed year for developers, marred by policy tweaks, expectation of impairments or asset value devaluations, particularly on hospitality assets amid the weaker operating outlook due to the COVID-19 pandemic, and policy tweaks. From the REITs’ perspective, mandated rental waivers or rebates and concerns over rental collections have dragged on earnings and stock price performance.
  • Going into 2021F, as we obtain more clarity on these overhanging concerns, we believe the sector may still have legs to run, underpinned by attractive valuations, ample liquidity amid a low interest rate environment. We maintain our Overweight stance on property developers and REITs.
  • Developers are trading at an average 52% discount to RNAV, which is at 1 s.d. below the sector’s long-term mean and close to the previous crisis level in 2009. On a P/BV basis, the sector is trading at 0.58x, midway between the -1 s.d. and long-term average multiple. We project the residential sector to be supported by robust end-buyer demand and forecast primary transaction volumes to remain stable at 9,000 units in 2021F, similar to our 2020 expectation. In terms of pricing, we expect private home prices to expand between 0-5% (vs. the +0.1% achieved for 9M20). With a more stable asset value outlook and no fire sale opportunities in sight, we believe developers would continue to re-examine their property portfolios for asset enhancement opportunities to create value within their holdings.
  • Singapore REITs (S-REITs) are trading at c.5% 12-month forward dividend yields, midway between the average and +1 s.d. long-term yield band, and at 1.06x P/BV. We expect S-REIT earnings to resume their northward trajectory on organic and inorganic prospects in 2021F. Our projected sector DPU growth of 11.4% for 2021F is led by our expectation of a recovery in hospitality and retail net profit, due to a low base in 2020, as well as the impact of full-year higher contributions from merged entities, such as Frasers Logistics & Commercial Trust (SGX:BUOU), and our assumption that SREITs will maintain their pre-COVID-19 payout ratio.
  • We believe S-REITs will continue looking for acquisition opportunities, given their current low cost of capital. Our current forecast has not factored in any pre-emptive acquisition accretion. In terms of stock picks, we continue to adopt a stock selection strategy.
  • Our strategy for developers would be to prefer those with high recurring cashflow base and strong balance sheets that would enable them to tap into any new reinvestment opportunities during this cycle. We like City Developments (SGX:C09) and CapitaLand (SGX:C31) for their attractive valuations and potential for asset enhancement opportunities.
  • For S-REITs, our top picks are Frasers Centrepoint Trust (SGX:J69U) and Frasers Logistics & Commercial Trust (SGX:BUOU). We like Frasers Centrepoint Trust as it is a pure suburban mall landlord in Singapore. We expect it to see a faster recovery compared with its peers; the stock is trading at 1x FY20 P/BV (vs. its pre-COVID-19 peak of 1.3x P/BV). Frasers Logistics & Commercial Trust offers strong inorganic growth potential through its deep sponsor pipeline, and its valuations remain attractive at c.5.4% FY21F dividend yield, in our view.


Singapore Residential Property Sector – Transaction volumes remain robust

  • Despite closure of show flats during the circuit breaker period, transaction volumes in the private residential market continue to be robust, with 10M20 primary sales reaching 8,329 units, a marginal 7% decline y-o-y, making up 92% of the upper-end of our 2020F volume projection of 9,000 units. Meanwhile, the resale market rebounded to 7,989 units in 10M20 (+6.8% y-o-y), after lagging in 1H20.
  • Residential prices are slightly higher y-o-y as at 3Q20. In terms of prices, according to the Urban Redevelopment Authority (URA), the 3Q20 residential price index was 0.8% higher q-o-q, buoyed by an uplift in non-landed prices in the Rest of Central Region (RCR) and Outside Central Region (OCR). This nudged private home prices to 0.1% above end-2019 level. Overall, private home prices are 12.9% above their recent trough in 2Q17, led by suburban projects’ price expansion.

Demand for and prices of private homes to remain stable.

  • Looking ahead, we anticipate demand for private homes to remain robust in a still-low interest rate environment and increased HDB upgrading activity. According to an article in the Straits Times, HDB announced during its Aug 2020 Built-to-Order (BTO) sale exercise for 7,862 flats that some of these units may take up to five years to complete due to existing site conditions, the calibrated restart of construction activities, and the requirement for building contractors to adhere to strict safe management measures to prevent a resurgence of COVID-19 at construction sites.
  • We believe this could divert some potential first-time home buyers to the HDB resale market, particularly where these buyers may enjoy government housing grants for the purchase of resale flats. This could lead to higher HDB upgrader demand for private homes. We forecast new home sale demand to stay stable at 9,000 units in 2021F.

Pace of new launches to remain brisk.

  • To date, 8,159 new residential units have been launched for 10M20, with new sales reaching 8,329 units. We expect developers to continue rolling out their new developments to capture buying interest. Projects that are priced competitively continue to garner better buying interest, and we anticipate this trend to continue.
  • Meanwhile, unsold inventory of uncompleted residential units in the pipeline continue to decline for seven straight quarters to 26,483 units at end-3Q20. At the same time, residential land supply from the government land sale (GLS) programme had also been reduced since 2019 following the en-bloc fervour in 2017/2018. In its newly announced 1H21 GLS programme, the government had earmarked land supply for 7,045 residential units in the confirmed and reserve lists, slightly higher than the 2H20 level.
  • Consequently, we believe that the near-term downward pressure on private home prices may be limited; we project private home prices to rise by 0-5% in 2021, pacing economic growth.

Surge in new completions from 2022 onwards.

  • That said, we expect new completions to pick up meaningfully from 2022-2023F as projects launched three years prior are completed. Based on URA estimates, the number of new completions of private homes are expected to rise from c.4,500 units in 2020F to c.11,000 by 2022F. This is likely to cap significant price movements in the longer run, in our view.

Asset enhancement initiatives to create more value within developers’ property portfolios.

  • In Mar 2019, the government announced the CBD Incentive and Strategic Development Incentive Scheme to encourage property developers/landlords to rejuvenate their older commercial properties in the CBD and reposition the area as a mixed-use district for work, live and play. With this scheme, developers are encouraged to unlock or create value from their older commercial properties.
  • City Developments and UOL Group (SGX:U14) have indicated that they have identified some of their older properties with redevelopment potential, such as Fuji Xerox Towers and Central Mall, owned by City Developments as well as the amalgamation of Odeon Towers and KH Kea Building by UOL, while CapitaLand has acquired ABI Plaza, which has redevelopment potential. Accretion from these value creation activities have not been factored into our RNAV estimates for these companies.

Singapore Residential Property Sector Stock Picks.

  • Our preferred picks are City Developments (SGX:C09), CapitaLand (SGX:C31) and UOL Group (SGX:U14).
  • Sector re-rating catalysts: good sell-through rates for new launches.
  • Downside risks: a prolonged drag from the COVID-19 outbreak, and a weaker-than-expected macro outlook, which could dampen demand for big-ticket items such as housing.


Singapore Retail Property Sector – Expect weak rental reversion in 2021


Retail sales recovered post circuit breaker re-opening.

  • The retail sector in Singapore has been hit hard by COVID-19. Non-essential businesses which account for 30-40% of the tenant mix of the malls were ordered to close when Singapore started its CB in early-April and they were only allowed to reopen in mid-Jun when Singapore started the phase 2 of economy reopening. Due to this, retail sales excluding motor vehicles plunged (-23% to -46% y-o-y in Apr-Jun 20) during the circuit breaker but it has since improved substantially in Jul to Sep 20 (-13% to -7% y-o-y).
  • However, the recovery is not across the board. Most of the spending was for necessities at supermarket/hypermarkets, mini marts/convenience stores, furniture and household equipment and computer & telecommunications equipment. Online retail sales shot up from 6% in Jan of total retail sales to a high of 24% in May but has since reduced to 11% in Sep.
  • While we believe online sales would be higher than pre-COVID-19 as more consumers become accustomed to shopping online, we believe that malls will stay relevant in Singapore given the small size and strong public transport connectivity of the country which makes the journey to the malls a lot more convenient and faster. Both platforms are also needed to serve different customers and products.

Higher retail space vacancy.

  • Retail space occupancy declined from 92.5% in 4Q2019 to 92% in 1Q2020. While it continued to decline to 90% in 2Q, it maintained at the same level in 3Q20 as supply was taken off the industry which could be due to closure for refurbishments. Rental index was on declining trend on a q-o-q basis since 1Q20 with fringe area rental declining by a larger extent (-11.4% on average in 9M20) as compared to central area (-7.8% on average in 9M20).
  • Supply in 2021-2023 of c.580k sf is slightly lower than historical 5-year average supply of 680k sf. This would help to partially buffer the rental decline due to COVID-19.

Rental rebates dragged landlords’ earnings.

  • In 3Q20, retail REITs continued to see weaker y-o-y revenue and NPI mainly due to rental rebates of up to 2 months given to tenants. Malls’ occupancy remained high at 95-98% as landlords focused on maintaining occupancy at the expense of rental revenue. While rental reversion was encouraging at flat to low-single-digit improvement in 1HFY20 as leases were renewed prior to COVID-19, rental reversion in 3Q20 declined by double digits (-15 to -20%), with the exception of Frasers Centrepoint Trust which delivered +1.9% over the same period.
  • Tenant sales and shopper traffic improved since the reopening of economy in June 2020. However, the pace of recovery was not consistent. Tenant sales and shopper traffic at suburban malls recovered to > 90% and 60% of pre-COVID-19 level while downtown malls generally saw slower recovery with tenant sales and shopper traffic hitting 70% and 60% of pre-COVID-19 levels respectively. Tenant sales have been recovering faster than shopper traffic due to pent-up demand, larger basket size per trip given the inconvenience caused by safety measures as well as more F&B tenants engaging in food delivery services. Tenants which have requested for rental deferment were just a handful. Hence, we are not overly concerned about the impact of potential rental default.
  • Asset devaluations for retail REITs have been manageable so far with flat to mid-single digit decline versus the last valuation date.

Domestic demand to drive tenant sales and shopper footfall.

  • Going forward, we expect footfall and tenant sales to continue to be driven by domestic demand in the near term. Both metrics should improve towards year-end and next year driven by year-end festive and holiday seasons and as office crowd returns gradually. Based on our malls’ carpark tracker, traffic has started to pick up recently. Downtown malls’ performance, however, will be capped by lack of tourists in the near term.
  • While we expect occupancy rate to remain high at 95-99%, rental reversion would be under pressure in the near term given the weak trading environment. We expect low-to-high single-digit full-year rental reversion in FY21F with downtown malls to be impacted more than suburban malls. There will still be rental rebates but we expect this to be on a much smaller scale as landlords shift focus from giving out direct rebates to marketing activities.
  • Although tenant turnover rate could be higher in 2021, this presents a good opportunity for the landlords to modify tenant mix to ensure their respective malls will remain relevant in the face of rising e-commerce adoption. These include plans to bring in more F&B, online-to-offline and experiential tenants to reposition the entire malls.

Singapore Retail Property Sector Stock Picks.

  • We expect retail REITs with suburban mall focus or a mixed portfolio with office to fare better than pure retail REITs. Our top pick is Frasers Centrepoint Trust (SGX:J69U) (ADD, target price S$2.89). We continue to like its pure suburban mall landlord in Singapore. We expect it to see faster recovery as compared to its peers. The stock is trading at 1x FY20 P/BV (-0.5x SD below mean) versus its pre-COVID-19 peak of 1.3x P/BV.
  • We also like Lendlease REIT (SGX:JYEU) (ADD, target price S$0.85) for its more resilient income as 30% of its income is supported by stable long lease of Sky Complex in Milan, Italy. We estimate that only 16% of its total income in FY21F will be affected by rental reversion which will be buffered by annual rental escalation from c.70% of its income.


Singapore Office Property Sector – Still assessing future demand

  • According to Urban Redevelopment Authority data, office the office rental index declined 4.5% q-o-q in 3Q20, bringing year-to-date retracement to 5.2% from end-2019 on weak macro outlook. Office rents remain close to the end 2017 level. In terms of capital values, office values ticked up 1% q-o-q and is now 11% below its 2Q19 peak.
  • Overall, office landlords, including REITs, continue to see positive rental reversions for 9M20, albeit at a more moderate pace. Most landlords have de-risked their portfolio with marginal amount leases scheduled to be renewed in 4Q20F. Leasing activity was focused on renewals, which accounted for half to two thirds of leasing transactions.
  • In terms of new demand, it came largely from real estate and property services, technology and banking and financial services sectors. Due to the circuit breaker, most office landlords indicate that only 25-30% of their tenants are physically back in their office premises.
  • In terms of new supply, there were ~463k sq ft of new completions in 9M20. However, there was a negative net absorption of ~872k sq ft of office space over the same period. Island-wide occupancy stood at 88% at end-3Q20. One notable observation from URA’s statistics is the delay in scheduled completions, which helped push back new supply into 2023-24F from 2022F. This should likely provide some support to near-term office rental outlook.
  • Against a backdrop of still weak macro outlook and lingering concerns over the impact of work-from-home (WFH) on office space demand, we expect the demand for office space to remain below its long-term average of c.1m sq ft p.a. in 2021F and project office rents to decline by up to 10% in 2020F and another -5% for 2021F.
  • An upside catalyst could be potential new demand from Chinese tech firms looking to expand their presence in Singapore.


Singapore Industrial Property Sector – Uneven recovery


Rentals declined even as occupancy ticked up.

  • According to JTC’s statistics, the rental index across all industrial segments slipped an average 0.9% q-o-q (- 1.6% y-o-y) in 3Q20 even as overall occupancy ticked up 0.2% pt q-o-q and 0.3% pt y-o-y, boosted by the demand for warehouse space for storage due to national stockpiling and accelerated e-commerce growth driving the demand for logistics services. These metrics are reflected in industrial REITs’ operating performance in 3QCY20, with portfolio occupancy remaining above 90% and experiencing slight negative rental reversion, with the exception of Mapletree Logistics Trust (SGX:M44U) and Ascendas REIT (SGX:A17U), which saw positive rental reversions.
  • As at 3Q20, there is potential supply of c.5m sqm of industrial gross floor area in the pipeline, scheduled to be completed between 4Q20-2024F. This is equivalent to ~7% of total industrial supply. The bulk of this is coming from the single-user and multi-user factory space. We believe this will likely continue to drag on rental outlook for factory space. Conversely, new supply in the warehouse segment is starting to taper off over 2021-2022F.
  • Acquisitive mode to remain, in our view. Industrial REITs continue to be very active on the acquisition front. Mapletree Logistics Trust had announced the purchase of S$1.09bn worth of properties in China, Vietnam and Malaysia in Oct 2020 from its sponsor while Ascendas REIT had announced the acquisition of 2 office properties in San Francisco and is proposing to buy a portfolio of data centres in Europe as well as a suburban office in Australia. The latter two are subject to completion of negotiations with vendors and satisfactory due diligence. We anticipate industrial REITs to continue to seek inorganic growth to drive their DPUs going forward.
  • According to Ministry of Trade and Industry, Singapore’s manufacturing output for Oct 2020 decreased 0.9% y-o-y (-2.7% excluding biomedical manufacturing output), led by declines in sectors such as electronics, chemicals, general manufacturing and transport engineering, partly offset by precision engineering and bio-medical engineering.
  • Looking ahead, our economist projects the Singapore economy to rebound by +5.3% y-o-y in 2021F after a 5.7% y-o-y contraction in 2020F. We anticipate that the recovery is likely to be uneven with general industry being slower to recover. We expect data centres and hi-spec industrial spaces to be more resilient as they benefit from the growing technology sector. Warehouses could see some support from the rise in e-commerce driving demand for logistics services. Online sales as a % of retail sales have contracted from the peak of 24.5% in May 2020 to 11.2% in Sep 2020, still higher than pre-Covid levels of 5- 8%. As such, we expect industrial rents to decline by 1-3% (for warehouse space) to 3-5% (for factory spaces).


Singapore Hospitality Property Sector – Market to price in ahead of recovery


Pick up in RevPAR.

  • 2019 was a good year for hospitality REITs. There was finally hope to recover after years of strong supply. However, the hope diminished as COVID-19 hit the industry. In 2019, industry RevPAR grew 2.3% and it continued to grow strongly at +5.2% in Jan 2020. In Feb 2020, Singapore RevPAR started to plunge as Singapore closed its borders on 31 Jan.
  • In the most recent reported month, Sep 2020, RevPAR fell 65% y-o-y but it was an improvement of 26% and 0.2% versus Jul and Aug 20, respectively. m-o-m RevPAR improvement was seen across all segments in Sep 20. Luxury and upscale hotel reported the largest m-o-m improvement of +12% and +33%, respectively, which we believe was driven by staycation demand. Economy and mid-tier RevPAR also improved 7-9% m-o-m which was likely driven by higher alternative business demand as well as staycation demand.
  • Visitor arrivals plunged 85% to 99% y-o-y in Mar to Sep 20 but there were sequential m-o-m improvements since Apr 20, driven by arrivals from Indonesia, Malaysia and China due to special travel arrangements as Singapore’s borders remain largely closed to foreigners except for travellers from Brunei, New Zealand, Australia and Vietnam.
  • Despite the weak tourist arrivals, hospitality REITs’ hotels’ occupancy in Singapore generally remained high at > 92-97% in 3Q, thanks to alternative businesses (mainly government contracts and foreign workers). Given the lower rate from alternative businesses which offset the effect of high occupancy, the REITs’ Singapore RevPAR fell 60.9% (CDL Hospitality Trusts - on a like-for-like basis, excluding W Hotel) and 55.8% (Far East Hospitality Trust) y-o-y respectively.
  • Approved hotels were allowed to open for leisure stays since Jul 2020 and the demand has been encouraging so far, with weekends achieving occupancies up to the permitted capacity. Hence, while y-o-y RevPAR comparison continued to be weak, q-o-q RevPAR improved 5% (Far East Hospitality Trust) to 9.3% (CDL Hospitality Trusts) due to higher occupancy rates from staycation demand. While bulk of the hotel rooms were blocked for alternative businesses, there were 10-20% rooms which are free for leisure stays.
  • Overseas, in 3Q20, CDL Hospitality Trusts saw 60-95% decline in RevPAR y-o-y (except NZ which was supported by alternative business) while Ascott Residence Trust’s RevPAU fell 70% y-o-y. On a q-o-q basis, Ascott Residence Trust saw encouraging improvement of 27% q-o-q. Countries with strong domestic demand and long stay guests such as China (3Q RevPAU -30% y-o-y) and Vietnam 3Q RevPAU -58% y-o-y) saw more resilient performance. There is no good comparison for CDL Hospitality Trusts’s hotels overseas as most of them are closed or was operating at very low occupancy level.
  • Looking ahead in 2021, we expect weaker demand from alternative businesses given the well-controlled COVID-19 situation in Singapore and as employers look for cheaper accommodation for their foreign workers. In fact, we understand that rates and demand from alternative businesses were weaker compared to during the circuit breaker. The weakening demand from alternative businesses needs to be offset by the real demand from tourists which we believe would only come in gradually as countries reopen their border in a gradual and cautious manner.
  • Although the REITs are seeing m-o-m improvement in overseas occupancy, we think the recovery remains volatile due to potential resurgence of cases. We think that the industry may only return to pre-COVID-19 level in 2023F/24F which is in line with Singapore Tourism Board’s expectations of a 3-5 years recovery journey. Fortunately, supply in the next few years is low which will help to support the recovery of the industry.

Singapore Hospitality Property Sector Stock Picks.

  • While journey to a full recovery remains uncertain, we think market would price in recovery ahead of fundamentals following news of vaccines achieving high efficacy rate (Pfizer and Moderna – 90+% efficacy; Oxford University and AstraZenaca – 70% efficacy with one dosing scheme resulting in a 90% efficacy). This is especially so when the stocks (excluding Far East Hospitality Trust) are trading at attractive valuation of 0.8x FY20 P/BV (-1 SD below mean).
  • Ascott Residence Trust (SGX:HMN) (ADD; target price S$1.05) is our top pick for the sector as we believe domestic travel would pick up before international travel and Ascott Residence Trust has the highest exposure to domestic demand among the hospitality stocks under our coverage.
  • Key risk for the Singapore property sector include further policy tightening and weak global recovery that would hamper external demand, resulting in weak economic outlook for Singapore and low appetite for big-ticket items like housing purchases.

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LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-16
SGX Stock Analyst Report ADD MAINTAIN ADD 3.420 SAME 3.420
ADD MAINTAIN ADD 10.100 SAME 10.100
ADD MAINTAIN ADD 2.890 SAME 2.890
ADD MAINTAIN ADD 1.500 SAME 1.500


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