Singapore REITs - DBS Research 2021-05-06: An Opportunity To Buy On Dips

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MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) MAPLETREE LOGISTICS TRUST (SGX:M44U) FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU)

Singapore REITs - An Opportunity To Buy On Dips

• Quick introduction of tighter measures to curb social gatherings in the hope of curbing the community spread.
• Companies to see Work in Office (WIO) capacity reduced to 50% (from 75%).
• Near-term impact on reopening trades (retail, office and hospitality) expected but rebound has historically been fast and furious.
• Industrial S-REITs to remain the bright stars.

What’s New

• In a setback to the positive momentum that we have seen in both the macro and operational front for the S-REITs, we believe that the increased volatility expected in the coming weeks (or month) amid tightening social measures will present investors with an opportunity to buy on dips (again!) for the quality names (S-REITs). Our thoughts appended and previous report: Singapore REITs - DBS Research 2021-05-03: Will It Be "Once Bitten, Twice Shy?"

What has happened:

• In a span of 5 days, the multi-ministry task force has further tightened measures on social gatherings in a bid to curb the spread of COVID-19 in Singapore. These measures will come into effect from the 8-30 May 2021.
• These measures include:
  • Reduction in permitted size of social gatherings roups of eight people to five.
  • Closure of indoor gyms as well as introduction of testing requirements for worship services and cinemas with more than 100 attendees.
  • Smaller capacities at attractions, libraries, tours and MICE events.
  • Reduction in the proportion of employees allowed to work in office (WIO) back to 50% from 75% previously.
• These measures will put the community back to “phase 2” of Singapore’s phased reopening strategy which started from 19 June 2020 to 28 December 2020.
• We also note that at this point, the possibility of Circuit Breaker 2.0 is “not to be ruled out” though we believe that the government will not be looking to revisit this.

Our thoughts and possible impact on S-REITs:

CBD-focused retail trades to be impacted as employees stay home; suburban malls to support a larger work-from-home (WFH) population.

• The lightning pace of tightening measures will hopefully stem the risk of further community spread quickly. The limitation imposed on social gatherings will likely have an immediate impact on shopping mall traffic and we see food & beverage (F&B) trades being impacted the most as consumers scale back on their social activities. While malls are likely to turn quieter in the immediate term, we do hope that the impact on operations (i.e. traffic data and tenant sales) will be limited to just the month of May 2021.
• In addition, with companies now having reduced capacity limits, retail trades and malls supporting the workforce within the Central Business District (CBD) is likely to see lower footfalls while the suburban malls, which through the COVID-19 pandemic experience, will once again prove to be more resilient.

Revisiting the historical S-REIT playbook; industrial S-REITs to turn into outperformers.

• A look back into the period 19 June 2020 to late December 2020 (representing phase 2 period of Singapore’s reopening) showed that the retail, hospitality and office S-REITs generally underperformed their industrial counterparts as investors sought shelter in the safer havens given uncertainty of subsequent waves. This was before confidence was restored upon emerging evidence of a vaccine with strong efficacy back in early November 2020.
• Over the period, the S-REIT sector was flattish (-0.3%) but we note that the Industrial S-REITs and hospitality S-REITs performed well, returning 4.6% and 7.0% respectively. Other sectors returned -2.1% (office) and -1.4% (retail).
• That said, we saw increased volatility within the period with most sectors seeing declines of -13% (hotel) to -15% (office and retail) before rebounding strongly as Singapore emerges out of Phase 2.

What should investors do this time round?

• Following up on our recent update Singapore REITs - DBS Research 2021-05-03: Will It Be "Once Bitten, Twice Shy?", our thoughts are:

Near-term weakness expected but a swift rebound in prices has also been proven.

• This time round, while we see near-term relative underperformance in the retail S-REITs (especially the discretionary focused) pulled down by expected operational weakness, this is likely to be short term and knee jerk in nature (if any) and will unlikely be structural. The reason for this optimism is that the government and community have better tools (trace together app, vaccination) and awareness this time round. The recent 1Q21 results have also shown that rebound in traffic and sales can be swift given the “pent-up demand” among consumers and “dominant malls” have proven to be able to capture the consumer dollar the fastest.
• The office S-REITs’ share prices will naturally turn weak but we do not expect to see operational cracks and with expectations shifting towards a more hybrid working model rather than remote working model. the biggest supporter in investors staying positioned within the sector. We pick Keppel REIT (SGX:K71U) to outperform.
• Hospitality S-REITs’ weakness will unlikely be significant as downside risks will likely be mitigated by the continuation of government quarantine business which will support positive cashflows. Our picks are CDL Hospitality Trusts (SGX:J85) and Far East Hospitality Trust (SGX:Q5T).
• We reiterate our preference for Industrial S-REITs (Mapletree Logistics Trust (SGX:M44U), Frasers Logistics & Commercial Trust (SGX:BUOU) and Mapletree Industrial Trust (SGX:ME8U)) given their relative safe haven status and their ability to still deliver both organic and inorganic growth in 2021. However, we remind investors of a potential third chance to buy the reopening plays on dips and not to miss out – third time’s a charm?
• We hope that a short-term hard tightening could hasten the pace to return to-normal again.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2021-05-06

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