Singapore REITs Monthly - Phillip Securities 2021-06-30: No Let-Up In Deal Momentum

Singapore REITs - Phillip Securities Research | SGinvestors.io MANULIFE US REIT (SGX:BTOU) ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Singapore REITs Monthly - No Let-Up In Deal Momentum

  • FTSE S-REIT Index inched up 2.9ppts in June, narrowing its gap with the STI and FTSE ST Real Estate Holding and Development Index. All sub-sectors in the green, led by Hospitality (+3.5%).
  • Dividend yield spread of 249bps is -1.4 standard deviation of 10-year average. Deal momentum persisted. Near-term interest rates still below 5- and 10-year historical levels, supportive of acquisitions.
  • Remain OVERWEIGHT with selective sector preferences. Catalysts expected from pick-up in economy. S-REITs expected to resume DPU growth, potentially delivering FY21e DPU yields of 3.9-8.6%. Prefer Retail and Industrial.
  • Top picks are Manulife US REIT (SGX:BTOU) and Ascendas REIT (SGX:A17U).


  • Deal momentum spilled into June with hospitality and retail REITs also getting into the action.
    • Ascott Residence Trust (SGX:HMN) acquired three Japan rental-housing assets for S$85.2mn, or an EBITDA yield of 4%. It also bought a 45% stake in a student accommodation in South Carolina, US. The remaining 45%/10% stakes will be held by sponsor Ascott Limited (not listed) and an unnamed US student-housing developer. The development costs S$146.2mn and carries an EBITDA yield of 6.2%.
    • Elsewhere, Lendlease Global Commercial REIT (SGX:JYEU) will raise its holding in integrated office and retail property, JEM, from 3.75% to 31.8%.
    • Prime US REIT (SGX:OXMU) snapped up two office towers in San Diego and Florida for US$245.5mn.
  • NYSE-listed Digital Realty Trust Inc (DLR US) is evaluating a data-centre REIT IPO in Singapore, potentially by year-end. The IPO could raise US$300-400mn, backed by a geographically diversified portfolio of 10 assets. This brings the number of potential REIT IPOs in 2021 to three. City Developments (SGX:C09) and unlisted Mapletree Investments are also mulling REIT IPOs.
  • As of 25 June 2021, 53% of the Singapore population had received at least one dose of COVID-19 vaccines. Another 36% had received two doses. The government has ramped up vaccination capabilities. From 26 June, Singapore will be able to administer up to 80,000 doses daily, a 70% increase from its previous 47,000. Singapore aims to vaccinate two-thirds of its population fully by National Day on 9 August. It is, moreover, considering allowing larger gatherings and COVID-19 testing in lieu of stay-home notice for vaccinated travellers. Vaccinations so far appear to be effective in containing rates of infection, transmissions and the severity of disease in individuals who contract the virus after vaccination.

Retail Sector

  • Shopper footfall thinned after Phase 2 Heightened Alert on 16 May 2021. Restrictions included a ban on dining in, work-from-home as the default and two unique household visitors per day. These measures hurt downtown malls more than heartland malls, which have the benefit of close proximity to household catchments. While group sizes have been increased from two to five since 14 June and 2-pax in-restaurant dining has been allowed since 21 June, the uplift is expected to be muted as lunch and dinner gatherings involving more than 2 persons will likely take place at home.
  • The government has enhanced its Job Supports Scheme to help retailers affected by Phase 2 Heightened Alert. From 16 May to 13 June 2021, F&B and gyms will receive 50% of wage support. Retail stores, cinema operators and affected personal care services will be given 30%. As part of Phase 3 Heightened Alert, F&B and gym operators will receive 10% wage support from 21 to 30 June 2021.
  • May’s retail sales index was -7.3% below 2019 levels. The F&B index was down 17.5%. Consumer spending has normalised at these levels since the pandemic. The rental index slipped 16.5% y-o-y in 1Q21 but vacancy improved to 8%, -0.5ppt shy of 1Q20 levels. We think that retail rents have bottomed. Still, given a 3-year rent cycle, negative reversions in the mid-single to mid-double digits can be expected as leases expire over the next 12 months.
  • During the pandemic, major landlords had established e-store and food-delivery platforms to provide tenants with online channels to capture retail spending. Support from landlords will be more targeted and operational going forward, instead of outright rental rebates. It may come in the form of advertising, promotions and waivers of listing, delivery and service charges for purchases made through their e-commerce platforms. The support is expected to lower sales and fulfilment costs for tenants as well as help malls keep consumer spending within their ecosystems.

Hospitality Sector

  • May’s hotel RevPAR fell 23% m-o-m on cancellations and postponements due to the two guest limits imposed during the Phase 2 Heightened Alert. Y-o-y, it grew 58% from a low base. RevPAR of S$61 was 68% below the 2019 average as borders remained closed to leisure travel. Singapore hoteliers will receive 30% wage support from April to June 2021, which will taper off to 10% from July to September 2021.
  • Near-term catalysts for the sector could include a substitution of COVID-19 testing for stay-home notice for vaccinated travellers. This is expected to provide a shot in the arm for business travel.



  • Bloomberg consensus forecasts that 10YSGS yields will remain below 1.6% from 2021 to 2023. As such, we expect 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. Interest rates remain below 5- and 10-year historical levels. Together with recovering market sentiment, these conditions should continue to fuel acquisitions.
  • With the Singapore economy on the mend, we think that requests for rental relief will wind down. S-REITs are expected to resume DPU growth, with all sectors except Hospitality returning to pre-pandemic DPU levels. S-REITs under over coverage are expected to deliver 3.9-8.6% FY21e DPU yields.

Sub-sector preferences: Retail and Industrial

  • Industrial REITs have been the most active in acquisitions, owing to an early recovery in their share prices. We think they will continue to lead the pack in acquisitions for the rest of 2021. Continued border closures and acclimatisation to online shopping have returned the RSI to pre-pandemic levels.
  • We think the earnings impact of rental rebates on retail REITs will be marginal. Rental rebates are likely to be reserved as a last resort as landlords move to provide targeted, operational support. Vacancy risks may be mitigated by supportive supply conditions.


  • Higher domestic spending has improved retail sales from -8% to 3% of pre-pandemic levels. Although the recent Phase 2 Heightened Alert was a minor setback for the industry, accelerated vaccinations will likely lower the frequency and extent of future containment measures. Central malls should make their comeback after the work-from-home default is lifted and in-restaurant group sizes are increased. Near term, weaker leasing demand and lower rents are expected as tenants rationalise costs.
  • Dominant central and suburban malls which are well-located and well-managed will likely be prioritised during this period of 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 in 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 office oversupply in the near term, despite mitigation from office stock taken offline for redevelopment. Leasing in 1Q21 picked up but rents could remain under pressure. The longer-term outlook of the office market is more 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) for its defensive portfolio with a long WALE of 5.7 years and lower downsizing risks in the mature, remote-work-adjusted US office market.

Industrial (OVERWEIGHT).

  • The outlook for data centres, hi-spec assets 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, spurred by online sales. Although light industrials form the bulk of new industrial supply which may hamper rent growth, demand from the electronics and manufacturing sectors should provide a headwind for this asset class.
  • Singapore’s 10-year plan to develop its manufacturing sector by 50% could stoke demand for light industrial and high-spec assets that could spill over to business parks for the location of corporate headquarters.
  • Top pick is Ascendas REIT (SGX:A17U) for its scale and diversified portfolio.

Hospitality (NEUTRAL).

  • The road to recovery remains long and windy. The industry may only return to pre-COVID levels in 2023-24, according to the Singapore Tourism Board’s 3-5-year recovery timeline. International borders are likely to remain closed till end-2021. Business travel is expected to be less frequent, as companies hold virtual business meetings to save costs.
  • Nonetheless, some MICE demand is expected to return, as business engagement and networking cannot be totally replicated in virtual meetings. 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.
  • Prefer Ascott Residence Trust (SGX:HMN) as we expect it to make a faster recovery from its 74% exposure to countries with large domestic markets, such as Australia, UK, US, France and China.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-06-30
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