Singapore REITs Monthly - Phillip Securities 2021-04-12: Not To Be Overlooked


Singapore REITs Monthly - Not To Be Overlooked

  • STI and FTSE ST Real Estate Holding and Development Index trading close to FTSE S-REIT Index, as investors rotate to cyclical sectors to tap recovery prospects. All sub-sectors in the green except Healthcare (-0.1%). Office (+8.5%) the biggest gainer.
  • Rising interest rates indicative of a recovering economy but will hurt REITs. Near term, we expect further interest rate growth to be capped. DPUs to stay in excess of interest-rate growth, providing upside for S-REITs.
  • Catalysts expected from pick-up in economy activity. S-REITs expected to resume DPU growth. S-REITs under our coverage expected to deliver FY21e DPU yields of 3.6-8.8%.
  • Remain OVERWEIGHT with selective sector preferences. Prefer Retail and Industrial.
  • Top picks are Manulife US REIT (SGX:BTOU) and Ascendas REIT (SGX:A17U).


Retail S-REITs

  • Singapore introduced a Fair Tenancy Framework for retail tenancies on 26 March 2021. Mandatory guidelines and best practices have been provided in a Code of Conduct, governing lease covenants and lease terms such as security deposits, rent structures, pre-terminations and electricity, advertising and promotion charges. Leases initiated from 1 June 2021 onwards must comply with these, though the Code will not be applied retrospectively.
  • Standardisation of contract terms will not have a significant impact on retail REITs. The guidelines are largely administrative in nature, with the exception of the guidelines on electricity charges. It is a common practice for landlords to purchase electricity in bulk from grid providers at wholesale prices and charge tenants commercial rates. This allows landlords to earn a margin on electricity charges. Under the Code, electricity must be charged to tenants on a pass-through basis without any mark-up. Alternatively, tenants must be allowed the option to buy their power from open electricity market retailers.
  • February 2021’s Retail Sales Index (RSI) growth ex-motor vehicles turned positive (+3.5%) for the first time in 13 months. This was aided by Chinese New Year celebrations. Jewellery & watches (+37%) and apparel (+19%) led the growth. Computer & telecommunication equipment (+20%), furniture & household (+17%) and recreational goods (+15%) also continued to grow y-o-y.
  • Central malls are expected to receive a shot in the arm from returning office crowds following a further relaxation of workplace capacity limits from 50% to 75% on 24 March 2021. That said, weaker leasing demand and lower rents may persist for some time as tenants rationalise costs. Dominant central and suburban malls which are located near transport nodes are likely to be prioritised when retailers consolidate stores.

Office S-REITs

  • DBS (SGX:D05) is in discussions to give up two and a half floors totalling 75,000 sq ft or 10.7% of its current space in Tower 3 of the Marina Bay Financial Centre (MBFC3) in December. This comes three years ahead of the expiry of its 12-year lease for 700,000 sq ft of space on 22 floors, signed in December 2012. MBFC3 is jointly owned by Keppel REIT (SGX:K71U), DBS and Hongkong Land (SGX:H78).
  • DBS joins the likes of Citigroup, Mizuho Financial Group and Sompo Insurance in cutting their office footprints in the aftermath of the pandemic.
    • Citigroup will be trimming its office space when its 10-year lease expires soon. Amazon will take up the three floors with 90,000 sq ft of space that Citigroup is relinquishing.
    • Mizuho will trim about 16,800 sq ft in Asia Square Tower2, while
    • Sompo Insurance has cut 40% of its 26,000 sq ft office space at Singapore Land Tower.
    • AXA will be looking for a smaller office to relocate to due to the redevelopment of AXA Towers, where it currently occupies 70,000 sq ft.
  • The office market will likely face some leasing pressure from downsizing in favour of hybrid or remote working, notwithstanding some demand support from displaced tenants from AXA Tower and Fuji Xerox which will be undergoing redevelopment, and overseas tech tenants.

Hospitality S-REITs

  • RevPAR in February 2021 was down 46% y-o-y. Hotel occupancy in January and February was 44% and 42% respectively, down from its 2019 average of 86%. Even during the festive period and holiday season in December 2020, occupancy was 61%. Business travel is returning in a small way. International visitor arrivals jumped 50% m-o-m from 18K to 27K in March 2021, though they were still down 88.7% y-o-y.
  • About 73% of Singaporeans have not utilised their SingapoRediscover Vouchers (SDVs). Under a scheme to boost local tourism, Singapore citizens above 18 years old have been each given S$100 of SDVs to spend at participating hotels and attractions. As at 28 March 2021, more than S$108m vouchers and additional expenditure had been spent, ever since redemptions began on 1 December 2020. Assuming all the S$100 SDVs were utilised during redemption, the scheme would have resulted in cash top-ups of 40.2% for the hospitality industry. The Hospitality sector will likely face another boost in occupancies during the June school holidays.

Sensitivity to interest rates

  • 10YSGS yields climbed 83bps from 4Q20’s 0.89% to 1.72% at the beginning April. Our sensitivity analysis suggests that in the worst case assuming no hedging, a 100bp increase in borrowing rates will result in a -6.1% to -29.6% impact on FY21e DPUs. If the various interest-rate hedges that REITs employ are taken into consideration, a 100bp increase in borrowing rates will have a 0% to -15.7% impact on FY21e DPUs for REITs under our coverage.
  • Across the sectors, retail REITs hedge the least against interest rates, at 54.3% of their fixed-rate debts. The other sub-sectors employ hedge ratios of above 72%. Refer to Figure 13 in report attached below for the borrowing costs and interest-rate hedges of REIT.
  • Overall, the impact of rising interest rates should be mitigated by hedging strategies and well-distributed debt maturities ranging from three to seven years.
  • Changing interest rates will also affect our valuations through the COE assumption. Based on our sensitivity analysis, a 50bp increase in the risk-free rates used in our COE assumptions will have a -0.2% to -5.3% impact on our target prices.



  • Following a sharp increase in 10YSGS yields from 4Q20’s 0.89% to 1.72% at the beginning of April, the FTSE REIT Index dividend yield spread has compressed to 2.16%. It is now near its historical low, at -1.9 standard deviation. Bloomberg consensus forecasts that 10YSGS yields will remain below 1.6% from 2021 to 2023. As such, we expect further interest-rate growth to be capped in the near term. S-REITs’ DPUs should stay in excess of interest-rate growth, providing upside for S-REITs.
  • With the Singapore economy on the mend, we think that requests for rental relief will wind down. S-REITs are expected to resume positive DPU growth, with all sectors except Hospitality recovering to pre-pandemic DPU levels. S-REITs under over coverage are expected to deliver 3.6-8.8% FY21e DPU yields.

Sub-sector preferences: Retail and Industrial

  • We believe that the Retail and Industrial sub-sectors will be the first to benefit from further economic reopening. Rightsizing remains a headwind for the Office sector, mitigated by supportive supply conditions. Recent share-price appreciation has limited upside for the Hospitality sector.


  • Higher domestic spending has improved retail sales from -3% to 3% of pre-pandemic levels. A further uplift is expected at central malls as more office workers flood back to their workplaces and when international borders eventually reopen. Having said that, weaker leasing demand and lower rents are expected as tenants rationalise costs in the near term. Dominant central and suburban malls which are well-located and well-managed will likely be prioritised amid retail consolidation and expansion. Suburban malls should stay resilient as more firms announce permanent hybrid work arrangements.
  • Prefer Frasers Centrepoint Trust (SGX:J69U) for its exposure to resilient, necessity-driven spending at suburban malls and growth in suburban catchments.


  • 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. This is 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 largely attributed to its political and operational stability, business-friendly policies and educated workforce.
  • Prefer Manulife US REIT (SGX:BTOU) (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 S-REITs (OVERWEIGHT).

  • 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. Manufacturing sentiment remains upbeat as global demand recovers. The leasing of light industrial factory space may be more challenged given new supply and lower pre-commitment levels of 20% or so. We expect Industrials to be resilient as recent acquisitions and AEIs have increased portfolio exposure to future-ready New Economy sectors.
  • Top pick is Ascendas REIT (SGX:A17U) (target price: S$3.64) for its diversified portfolio. Ascendas REIT is 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 S-REITs (NEUTRAL).

  • Rising share prices have removed much of the upside for hospitality counters. 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 expectation of a 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. Leisure travel is expected to recover faster than business travel, which is likely to be less frequent, as companies save costs by holding online business meetings.
  • 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. 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) (target price: S$1.17) as we expect it to make a faster recovery from its 74% exposure to countries with large domestic markets.

See complete analysis and the latest S-REITs peer comparison table in report attached below.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-04-12
SGX Stock Analyst Report BUY MAINTAIN BUY 3.640 SAME 3.640