Singapore REITs Monthly - Phillip Securities 2021-02-22: Brighter Future


Singapore REITs Monthly - Brighter Future

  • FTSE S-REIT Index fell 4.6% m-o-m, in line with the Singapore market. Industrial was the only sub-sector in the green (+0.3%). Retail REITs fared the worst, down 4.8%.
  • Sector yield spread dipped 13bps m-o-m to 288bps (-0.9 SD), following lower 12-month trailing DPUs and a 23bp m-o-m increase in 10YSGS yield. 3MSOR was largely unchanged at 0.24%.
  • Remain OVERWEIGHT on SREITs with catalysts expected from acquisitions fuelled by conducive interest rates. Sub-sector preferences are retail and hospitality.
  • Top picks are


  • Leasing remained challenging for all sectors as companies held off expansion and relocation. Renewals are expected to form the bulk of leases as businesses try to preserve capital and save on relocation.
  • During Budget 2021, the government announced an extension of the Job Support Scheme (JSS) for hard-hit sectors which would have ended by March 2021. The tourism sector will get an additional 30% support for wages paid from April to June 2021 and 10% support for wages paid from July to September 2021. Retail players will get 10% wage support for three months, covering wages paid up to June 2021.

Office REITs

  • Industry rents and occupancy were down in 2020. The Central rental index shed 9.0% y-o-y while fringe rents fell 8.5%. Island-wide net absorption was negative for the fourth consecutive quarter (FY20: -0.85mn sq ft), weighed down by the fringe. CBD core net absorption, which comprises Downtown, Central Orchard and Rest of Central, eked out a positive 0.2mn sq ft net absorption, indicating a flight to quality.
  • Five-year supply of 0.7mn sq ft is below its 5-year historical average of 1.0mn sq ft. About 0.9mn sq ft of CBD supply, representing 1.6% of current CBD stock, is expected to hit the market in 2021.
  • Integrated development, CapitaSpring, accounts for 70% of 2021 supply. Some 38% of the space has been committed, with an additional 22% in advanced leased negotiations.
  • Backfilling of space in the CBD is encouraging. Leasing is expected to be weak in 1H21 and the market may continue to downsize as occupiers re-evaluate their space needs. Relocation of displaced tenants of AXA Tower (700,000 sq ft), Fuji Xerox Tower (353,575 sq ft) and Central Mall (131,000 sq ft), which will undergo redevelopment in 2021/22, will help to soak up some of the vacancy.

Industrial REITs

  • Industrial rents appear to have bottomed out after 22 quarters of decline. Occupancy continued to tick up across the sub-sectors. Encouragingly, economic data continues to recover. December’s NODX grew 6.8% y-o-y, bringing FY20’s growth to 4.3%. January’s PMI inched up 0.2pt m-o-m to 50.7, posting the seventh month of expansion.
  • While construction slippage has pushed new supply from 2020 to 2021, much of the new stock will come from the light-industrial asset class. Low pre-commitments of 17% will weigh on the light-industrial segment. Leasing pressure for the other asset classes is moderate. About 63% of the 9.2% increase in business-park stock has been pre-committed and 27% of new warehouse stock leased. Hi-spec assets are 74% pre-committed.
  • The government’s new 10-year plan to expand Singapore’s manufacturing sector by 50% will lift the sector in the mid-term. Industrial SREITs had shown units to prospective foreign tenants in 4Q20. Restrictions in the construction sector may thrust prospective tenants towards convert-to-suit assets instead of building their own facilities. This may benefit existing industrial owners and help to improve occupancies further.

Retail REITs

  • Retail occupancy rebounded 0.8ppt in 3Q20 to 91.2%, 1.3ppts lower y-o-y. Rents, however, continued to dip, by 5.2% to end the year 14.7% lower y-o-y. Central and fringe rents fell 15.2% and 13.3% respectively. The decline is expected to continue as retail landlords prioritise occupancy over rents and exercise flexibility in lease negotiations.
  • Higher percentages of e-commerce sales will likely persist. Retailers will re-evaluate their business models to optimise their online-vs-offline sales and reconsider the value-add from having a retail presence. We expect normalised lease structures to incorporate a marginally higher percentage of risk-sharing, especially for discretionary-trade sectors. The market may continue to phase out ailing concepts such a department stores. However, store expansion by retail and F&B tenants is encouraging.
  • We believe that suburban malls will remain in favour, supported by increased day-time populations from hybrid-work arrangements. The increase in group size from five to eight people should provide another shot in the arm for F&B establishments.

Hospitality REITs

  • Singapore hoteliers are expected to have profited from SingapoRediscover vouchers during the festive period in December. High-profile events such as the World Economic Forum to be held in Singapore will reinforce Singapore’s standing as a MICE venue and signal confidence in Singapore’s ability to host international events in a safe way.
  • The government has tapped 30- 70 hotels - out of 264 gazetted hotels island-wide - to serve as designated facilities for people serving stay-home notice. Flexible arrangements allow these facilities to be activated or deactivated depending on demand. Several hospitality SREITs have assets which are on government contracts. We understand from them that block-booking rates have bottomed and are unlikely to fall further.
  • Vaccine rollout is underway. According to Our World in Data, major economies such as the US and UK are leading the way in immunisation rates. They have vaccinated 26 and 18 people per 100 people respectively in the two months after vaccine approval.



  • REITs have resumed their quest for acquisitions, spurred by low interest rates and share-price recoveries. The establishment of travel channels with more countries is expected to pave the way for more overseas asset-acquisition negotiations. With interest rates expected to remain low, share prices recovering and confidence returning to capital markets, there could be more M&A opportunities for REITs.

Sub-sector preferences: retail and hospitality

  • We believe that the retail and hospitality sub-sectors will be the first to benefit from further economic reopening. Vaccine rollout has improved visibility, which is expected to lift the share-price overhang for hospitality REITs.


  • While weaker demand and lower rents are expected as tenants rationalise costs in the near term, F&B sales could be lifted by a relaxation of group size and capacity restrictions under Phase 3 reopening. Central malls are expected to enjoy a more pronounced recovery due to returning office crowds. Suburban malls should, nevertheless, stay resilient, as more firms announce permanent hybrid work arrangements. Dominant central and suburban malls which are located near transport nodes are likely to be prioritised when retailers consolidate stores.
  • Prefer Frasers Centrepoint Trust (SGX:J69U) (BUY, target price S$2.93) for its exposure to resilient, necessity-driven spending at suburban malls and growth in suburban catchments.

Office (NEUTRAL).

  • Lacklustre demand and downsizing from the adoption of permanent hybrid work arrangements will likely result in oversupply in the office market in the near term, despite mitigation from office stock taken offline for redevelopment. Rents could remain under pressure. Still, the long-term outlook of the office market is optimistic as Singapore remains one of the top cities for the location of regional headquarters. This is attributable to its political and operational stability, business-friendly policies and educated workforce.
  • Prefer Manulife US REIT (SGX:BTOU) (BUY, target price US$0.84) for its defensive portfolio with a long WALE of 5.7 years and lower downsizing risks in the mature, remote-working-adjusted US office market.

Industrial (NEUTRAL).

  • The outlook for data centres, hi-spec and business parks remains favourable. These asset classes are supported by a growing technology sector and low supply under construction. Warehouses have been benefitting from higher demand from logistics players, given a higher percentage of online sales. Leasing of light industrial factory space may be muted as global demand is still on the mend. The outlook for factory assets remains challenging given considerable new supply.
  • Top pick is Ascendas REIT (SGX:A17U) (BUY, target price S$3.73) for its diversified portfolio. Ascendas REIT is also positioned to capture new economy sectors. Some 93% of its assets are hi-spec, logistics and business-park assets catering to the biomedical, hi-tech, e-commerce and knowledge-driven industries.

Hospitality (OVERWEIGHT).

  • We believe the hospitality sector faces a long road to recovery. We estimate that the industry may only return to pre-COVID levels in 2023/24, in line with the Singapore Tourism Board’s 3-5-year recovery timeline. We think that international borders will remain largely closed in 1H21. Economies with sizeable domestic demand such as China, the UK, France, Australia and the US will be the first to recover, in our view. Business travel is likely to be less frequent, as companies hold business meetings virtually to save costs.
  • On the other hand, some MICE demand is expected to return, as certain aspects of business engagement and networking cannot be replicated by virtual meetings. Also, digital adoption has resulted in leaner cost and operating structures for hoteliers, resulting in higher profit margins. COVID-19 has, moreover, set new historical lows for the sector. This may result in lower minimum rents in future master lease negotiations.
  • Hospitality counters are still trading at depressed levels and should be positioned for a recovery. High efficacy rates of approved Moderna and Pfizer-BioNTech vaccines and high participation in the COVAX programme have lifted the cloud of uncertainty and provided a more visible timeline to recovery. This should lift the price overhang for hospitality REITs.
  • Prefer Ascott Residence Trust (SGX:HMN) (BUY, target price S$1.17) as we expect it to make a faster recovery from its 74% exposure to countries with large domestic markets.

Continue to read the report attached below for detailed analysis and S-REITs peer comparison table.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 0.840 SAME 0.840