Singapore REITs Monthly - Phillip Securities 2022-06-20: Temporary Pain; Impending Rally

Singapore REITs Monthly - Phillip Securities Research | SGinvestors.io FRASERS HOSPITALITY TRUST (SGX:ACV) EC WORLD REIT (SGX:BWCU)

Singapore REITs Monthly - Temporary Pain; Impending Rally

  • FTSE S-REIT Index dipped 1.3% m-o-m, as interest rates climb. Hospitality REITs led the pack while overseas industrial S-REITs were the biggest losers (-11.4ppts m-o-m) due to refinancing jitters surrounding EC World REIT (SGX:BWCU) and a high proportion of unhedged interest rate and higher interest costs.
  • Based on the median FOMC member’s Fed fund rate forecast of 3.4% at year end, we could see another 165 bps increase in the Fed rate. Our research team believes that the rate of interest rates hikes would likely peak in 3Q22 before moderating.
  • We remain OVERWEIGHT on the REIT sector with preference on the office and hospitality sectors.
  • S-REITs under our coverage are expected to deliver FY22e DPU yields of 4.3-9.9%.


  • The Federal Open Market Committee (FOMC) meeting on 15 June 2022, cumulated in a 75bps increase, raising the Fed rate from 0.75-1.0% to 1.5-1.75%. The median FOMC member expects the Fed fund rate to be 3.4% at year end, up from Mar 22’s forecast of 1.9%, suggesting a much steeper rate hike path. However, we believe that the impending interest rate hikes have been largely priced in.
  • The FTSE REITs Index has pulled back 3.6% year-to-date and REITs under our coverage are expected to deliver FY22e DPUs of 4.3-9.9%. Based on our sensitivity analysis, a 150bps increase in cost of borrowing will lower FY22e DPU by 3-13% on a hedged basis, resulting in DPU yields of 3.7- 9.2%, which is a at the respective S-REIT’s average DPU yield.
  • At the most conservative, assuming no interest rate hedge, our sensitivity analysis reveals a 12-23% cut in FY22e DPU and DPU yields of 3.3-8.3%.
  • The proposed privatisation of Frasers Hospitality Trust (SGX:ACV) was announced on 13 June 2022. The sponsor, Frasers Property Limited (SGX:TQ5), has offered to acquire all issued stapled securities of Frasers Hospitality Trust, excluding those owned by TCC group (36.72%) and Frasers Property subsidiaries (25.8%). The scheme consideration of S$0.70 per stapled security is at a 45% premium over the 1-month VWAP and a 7.1% premium to NAVPS. The implied P/NAV of 1.07x is a 42.3% and 33.2% premium to the 3- and 5-year average P/NAV of Frasers Hospitality Trust. The scheme will increase Frasers Property’s ownership of Frasers Hospitality Trust from 25.8% to 63.28%, with the remaining units held by TCC Group.
  • The privatisation was initiated by Frasers Hospitality Trust following a strategic review by Frasers Hospitality Trust’s independent directors, which concluded that the privatisation by Frasers Property would allow unitholders to realise their investments with a high degree of certainty given the
    1. strengthening of the Singapore dollar against Frasers Hospitality Trust’s operating currencies;
    2. uncertainty in recovery and outlook; and
    3. Frasers Hospitality Trust’s small size and liquidity which has hindered index inclusion and flexibility in pursuing inorganic growth.

Retail S-REITs

  • Workplace capacity was raised to 75% and 100% from 29 March and 26 April respectively.
  • Apr 22 Retail Sales Index (exclude Motor Vehicles) climbed 15.7% y-o-y, punching 4.5% above Apr 19 levels, with most sectors in the green except mini-marts and optical goods & books. Discretionary categories like fashion (+42.4%), department stores (+31.0%), watches & jewellery (+25.2%) and F&B (+35.7%) were the outperformers, as more employees return to offices.
  • The F&B services index was 3.0% below Apr 19 levels, the tightest since the start of the pandemic. Return to office has spurred more corporate and social dining, while the pickup in events and inbound tourism should give 2H22’s numbers a boost.

Hospitality S-REITs

  • May 22’s international visitor arrivals (IVA) jumped 42% m-o-m after the removal of pre-departure testing requirement for fully vaccinated travellers. This was 28% of pre-pandemic IVA, a significant improvement compared to Apr 22 and Mar 22’s 19% and 8% respectively. Apr 22 RevPAR (revenue per available room) jumped 19.4% m-o-m and 66.6% y-o-y, at 73.5% of pre-pandemic levels compared to 62.4% in Mar 22.
  • According to Singapore Tourism Board, at least 66 international events are slated to happen in Singapore for the rest of 2022. This includes MICE events that have previously been held in Hong Kong such as the Jewellery and Gem World Singapore, SuperReturn Asia and Cosmoprof Asia and wine and spirits exhibition, Vinexpo Asia. The higher corporate and leisure demand is expected to support average daily rates (ADRs) and consequently RevPAR.



  • S-REITs are not spared from the ongoing geopolitical uncertainty, inflationary cost and market volatility. The higher interest rate will hit S-REITs on two fronts – higher interest expense, as well as slowing acquisition momentum from higher cost of financing. We may see some downward DPU pressure from higher interest and operating expenses.
  • The raising of interest rates is intended to keep inflation and growth in check. Share prices have pulled back in anticipation of the higher interest rate environment and appear to have been largely priced in.
  • Our research team believes that the rate interest rates would likely peak in 3Q22 before moderating. We remain OVERWEIGHT on the REIT sector as we think REITs could rally once central banks begin lowering rates.

Sub-sector preferences: Office REITs and Hospitality REITs

  • We rotate our S-REIT subsector preference from industrial and retail to office and hospitality. Geopolitical uncertainty and tapering growth forecasts may translate into more conservative business and consumer sentiment if the US is unable to engineer a soft landing, in which case retail and industrial REITs would be most at risk.
  • We prefer the Singapore office sector due to the improving occupancy levels amid lower new supply, as well as the hospitality sector on the resumption of international travel.


  • Retail occupancy hit a 10-year low in 2020 but has since rebounded to 92% and we are starting to see rents bottom out. Reversions for suburban malls are starting to turn positive while negative reversions for downtown malls are narrowing. There is also very little new supply hitting the market. Return to office and a pick-up in social activities should help lift tenant sales and return confidence back to retailers.
  • Retail REITs should continue to recover on the back of return to office, pick up in corporate and social gatherings and return of MICE and leisure travellers. However, recession fears may crimp consumer spending over the next 3-6 months.


  • The office market is showing signs of recovery. Core CBD rents posted three consecutive quarters of growth, although occupancy at 88% is still 2ppts below the 5- year average. 2020-22 average supply of ~0.5mil sq ft of space was below the 5-year historical average of 0.8mil sq ft.
  • After two years, businesses are relooking at returning to office owing to Singapore’s endemic stance towards COVID-19. The low vacancy, particularly in Grade A CBD office should continue to deliver positive reversions. Singapore has benefitted from the relocation of companies from Hong Kong and beyond.

Industrial REITs (NEUTRAL).

  • Rents have bottomed out after declining for 7 years while occupancy has recovered back to 2016 levels due to better occupancy at factories and warehouses. Industrial REITs are benefiting from the secular growth of new economy tenants such as tech, life sciences, biomedical, semi-con and electronics manufacturing, which typically locate themselves in high-spec, science and business parks and warehouses.
  • We are also seeing structural shifts, such as e-commerce and manufacturers moving from just-in-time inventory management to just-in-case in view of supply chain disruptions. Despite this, we are cautious that the looming possibility of a hard landing slowing global demand and consumer spending may result in weaker manufacturing and warehousing demand.

Hospitality REITs (OVERWEIGHT).

  • 1Q22 RevPAR recovery was driven by the corporate segment. The removal of testing and isolation for fully vaccinated travellers in Mar/Apr22 has positioned Singapore as a suitable MICE and entertainment destination.
  • Resumption of global travel and pent-up demand for both corporate and leisure travel should continue to drive average daily rates (ADRs) and RevPAR.

See the S-REIT peer comparison table in report attached below.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2022-06-20
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000