Singapore REITs - DBS Research 2021-05-03: Will It Be “Once Bitten, Twice Shy?”

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MAPLETREE LOGISTICS TRUST (SGX:M44U) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Singapore REITs - Will It Be “Once Bitten, Twice Shy?”

• Government introduces tighter measures to curb social gatherings; more measures possible if cases remain stubbornly high.
• Near term weakness for “re-opening trade” office and retail S-REITs but do not expect stocks to revisit the “lows” in March 2020.
• Investors may get impatient waiting for the rebound in the hospitality sector to materialise but we are too near the end to “give up”.
• Logistics S-REITs best placed to deliver resilient earnings and growth even in the “worst case scenario”.

Tighter measures to curb latest spike in COVID-19 community cases.

• The multi-ministry taskforce has tightened measures in response to the growing number of community cases in the recent week. These measures will last 2 weeks (1-14 May 2021). Some of these measures and recommendations include:
  • Stricter limits on the number of people in shopping malls (1 pax per 10sqm from 1 pax per 8sqm).
  • Attractions to see reduced capacity limits of 50% (from 65%).
  • Residents to restrict social gatherings to 2x a day.
  • Mall shops and locations visited by the Tan Tock Seng Hospital (TTSH) cluster were closed over the weekend (1-2 May 2021) for deep cleaning.
  • Employers are encouraged to allow staff to work from home (WFH) as far as possible.
  • Singapore will also close its borders to long-term and short-term visitors who have been in Bangladesh, Nepal, Pakistan and Sri Lanka in the last 2 weeks.

Our thoughts and possible impact on S-REITs:

Once bitten, twice shy?

• With the experience in combating the spread of the COVID-19 virus in the community since a year ago, the government has, this time round, responded promptly and will continue to be agile in their approach to stamp out further spread of the virus in the community. This strategy should be read positively in our view as the government is working to prevent the chance of a slip back into circuit breaker 2.0. This will be detrimental to businesses and potentially reset the positive economic growth momentum seen in recent quarters.
• We also believe the local community is now “wiser”, having experienced the circuit breaker (CB) back in April- May 2020. We believe that most would be more cautious this time round, and scale back on their social gatherings and activities considering rising community cases. That said, in the first weekend post measures, anecdotal experience from our visits to restaurants (for dinner and not shopping!) showed that crowds were visibly thinner in selected locations. However, on Sunday, popular suburban malls and Orchard Road malls continue to see good crowds.

Increased volatility expected in “re-opening trade” S-REITs in the near term.

• Investors have been positioning themselves to the more cyclical subsectors as the economy started to re-open since the start of the year. This “re-opening trade” has seen retail S-REITs, office S-REITs and hospitality S-REITs performing well year-to-date, registering positive returns of 4.0% to 8.0%.
• Looking ahead, in the immediate term, we expect these S-REITs to underperform, but do not expect the sector to re-test the lows in March 2020. The reason is that the government and the community are now better prepared to work together to curb the community spread and thus financial impact to landlords will likely be marginal (if any).
• Within the retail space, we anticipate that S-REITs with a focus on more discretionary trades (SPH REIT (SGX:SK6U), Starhill Global REIT (SGX:P40U), Lendlease REIT (SGX:JYEU), Mapletree Commercial Trust (SGX:N2IU)Mapletree Commercial Trust (SGX:N2IU)) may see more near term volatility. For Frasers Centrepoint Trust (SGX:J69U), while the stock price may drop together with its retail peers, it should be more resilient given its focus on more essential trades and as a beneficiary of the structural change in WFH trend as more workers may patronize the malls in the weekdays.
• Within the office focused names, we believe that Keppel REIT (SGX:K71U), given its pure office focus, should see the least downside given positive DPU momentum from recent acquisitions.
• Industrial S-REITs have understandably underperformed year-to-date but may see rotational interest in the immediate term. We maintain our preference for logistics focused names (Mapletree Logistics Trust (SGX:M44U) and Frasers Logistics & Commercial Trust (SGX:BUOU)) given the expected earnings resilience while earnings of Mapletree Industrial Trust (SGX:ME8U) and other large cap Industrial S-REITs may surprise on the upside.
• Hospitality S-REITs rebounded strongly last year but have returned a flattish performance year-to-date. While investors may grow impatient given the potential delay in the expected recovery in tourism from 2H21, downside risk (especially for Singapore focused hotels) is mitigated by the possible extension of the government block-booking hotels for quarantine purposes beyond 1H21, which provides positive cashflow for demand starved hotels. While staycation demand in the near term may fall in the immediate term, we expect overall impact on earnings to be marginal.

What are the potential risks:

• The situation remains fluid and the ability to curb the spread of the virus in the community is of utmost importance. We see the following risks if the community cases stay stubbornly high over the next few weeks and further actions may involve:
  • Heightened policing and regulation at malls if community cases rise.
    • Further tighter traffic measures, safe distancing or capacity curbs maybe re-introduced if community spread is anticipated to creep up. Measures could include shorter operating hours for malls, which will have an impact on tenant sales trends in the coming weeks.
  • Further mandatory rental rebates?
    • Unlikely for now, in our view. While this is not expected at this juncture, investors may be concerned that landlords (especially retail) may need to provide for reliefs if malls are mandated to close.
    • We do not anticipate rental rebates to be mandated like in the previous round in Apr-July 2020, unless we enter into circuit breaker 2.0, which is a remote possibility at this stage. If any, we expect retail landlords are likely be more targeted in their assistance and we should be looking at financial support from the government in this aspect.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2021-05-03

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