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Singapore REITs - UOB Kay Hian 2022-06-03: Weighing The Odds – Upside From Reopening Against Perceived Threat From Inflation

Singapore REITs - UOB Kay Hian Research | SGinvestors.io ASCOTT RESIDENCE TRUST (SGX:HMN) CDL HOSPITALITY TRUSTS (SGX:J85) FAR EAST HOSPITALITY TRUST (SGX:Q5T) FRASERS CENTREPOINT TRUST (SGX:J69U) LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU) KEPPEL REIT (SGX:K71U) ELITE COMMERCIAL REIT (SGX:MXNU) KEPPEL PACIFIC OAK US REIT (SGX:CMOU) UNITED HAMPSHIRE US REIT (SGX:ODBU)

Singapore REITs - Weighing The Odds – Upside From Reopening Against Perceived Threat From Inflation




Freedom Day marks an orderly full-fledged reopening.

  • The easing of restrictions in Apr 22 marks the start of Singaporeans living with COVID-19 as an endemic disease. The easing benefits all sub-sectors of the S-REIT market, including hospitality, retail and office.
  • Singapore’s international borders are fully reopened to vaccinated travellers with the launch of the Vaccinated Travel Framework. Food & Beverage establishments are operating at full capacity as the cap on group size of 10 persons was lifted. All employees are allowed back to their workplaces.


Nascent signs of easing of inflationary pressure have emerged.

  • US core PCE inflation peaked at 5.3% in Feb 22, the fastest pace in 30 years. Core PCE inflation eased 0.3ppt m-o-m to 4.9% in Apr 22. The easing of inflationary pressure coincided with a pick-up in economic activities after new cases of the Omicron variant subsided.
  • Implied inflation based on five-year Treasury Inflation-Protected Securities (TIPS) moderated from a peak of 3.6% in mid-April to the current 2.9%. The Congressional Budget Office expects CPI to ease to 4.7% in 4Q22 from 8.3% in Apr 22.


Yield curve indicates a soft landing.

  • We expect a series of three successive 50bp hikes on 4 May 22, 15 Jun 22 and 27 Jul 22, followed by three successive 25bp hikes in September, November and December. US Fed Funds rate would thus hit 2.5% at end-22.
  • The yield curve inverted temporarily in Apr 22, suggesting a potential slowdown. It steepened again in May 22 and is currently upward-sloping. Current short-end of the yield curve implies forward short-term interest rates at 2.1% for 1-year, 3.1% for 2-year and 3.1% for 3-year. The economy seems to be coping with external shocks.


Commercial real estate is an important hedge against inflation.

  • Landlords could raise rents to keep abreast of inflation. Higher cost of construction reduces the competition for constrained future new supply. Appreciation in capital value could also lower loan-to-value ratio for mortgage debts. Landlords’ ability to pass higher rents to tenants depends on fundamental factors, such as location of properties, demographics, migration trends, demand/supply dynamics and vacancy rate.


Adapting to changes in macroeconomics and geopolitics.

  • S-REITs are not out of the woods yet but the gradual easing of inflationary pressure provides some respite. In light of the elevated government bond yields and inflationary pressure potentially pushing rents higher, we have utilised a higher risk-free rate of 3.0% (previous: 2.0%) and pushed terminal growth higher by 0.8ppt in our DDM valuations for S-REITs.
  • On average, we have adjusted target prices for 20 S-REITs under our coverage lower by 5%.


BUY hospitality REITs as reopening plays.

  • Hospitality REITs benefit from the resurgence and pent-up demand for travel. Tickets for Formula 1 Singapore Grand Prix in Sep 22 have already sold out and MICE events should pick-up in 2H22.

Ascott Residence Trust (SGX:HMN)

  • Ascott Residence Trust benefits from strong pick-up since Mar 22 in countries with large domestic markets, such as the US, the UK, Japan and Australia. Longer-stay properties already accounted for 28% of gross profit in 1Q22.
  • BUY, target price S$1.25.

CDL Hospitality Trusts (SGX:J85)

  • Singapore fully reopened its international borders to vaccinated travellers in Apr 22. UK and Maldives are expected to turn in good performances.
  • BUY, target price S$1.48.

Far East Hospitality Trust (SGX:Q5T)

  • Completed the divestment of Central Square for S$313.2m on 24 Mar 22. Aggregate leverage has dropped 4.9ppt q-o-q to 33.4% in 1Q22.
  • BUY, Target price: S$0.78.


BUY retail REITs as reopening plays.

  • Downtown malls benefit from the return of office workers in 2Q22 and tourists in 2H22. Tourists accounted for 22.3% of retail sales excluding motor vehicles in 2019 (pre-COVID-19).

Frasers Centrepoint Trust (SGX:J69U)

  • Tenant sales have surpassed pre-COVID-19 levels since Oct 21. Occupancy cost has eased to 16.2% in 1HFY22 (FY21: 17.5%).
  • BUY, target price: S$2.79.

Lendlease Global Commercial REIT (SGX:JYEU)

  • Jem became Lendlease REIT’s largest asset (46.8% of AUM) after the acquisition of the remaining 68.2% stake was completed on 22 Apr 22. Multi-functional event space at Grange Road Car Park is scheduled to be operational by early-23.
  • BUY, target price S$0.96.


BUY office REITs as reopening plays.

  • CBRE forecast rents for Grade A Core CBD to recover 6.9% to S$11.55psf/month in 2022. Amazon and Meta Platforms are said to be taking office space at IOI Central Boulevard Towers, which is to be completed in 4Q23.

Keppel REIT (SGX:K71U)

  • Keppel REIT is finalising lease documentation with a few prospective tenants, which would improve portfolio occupancy by 1.9ppt to 97% if successfully signed.
  • BUY, target price: S$1.41.


Selective BUYs for defensive and counter-cyclical yield plays.

  • From a bottom-up basis, we have picked three defensive S-REITs ELITE, KORE and UHU that provide attractive yields of 7.7%, 8.7% and 9.8% respectively.

Elite Commercial REIT (SGX:MXNU)

  • Renegotiation of lease terms led to break clauses being removed from 108 DWP leases. We estimate the step-up in rents at 15.4% for Apr 23.
  • BUY, target price: £0.83.

Keppel Pacific Oak US REIT (SGX:CMOU)

  • Management guided positive rent reversion at mid-single-digit in 2022, driven by Seattle and Sacramento. The redevelopment of multi-family units atop the car park at The Plaza Buildings will be finalised over the next two quarters.
  • BUY, target price: US$1.01.

United Hampshire US REIT (SGX:ODBU)

  • Occupancy of Grocery & Necessity Retail Properties improved 1.1ppt q-o-q to 96.4% in 1Q22. United Hampshire US REIT plans to focus on acquisition of strip centres along the East Coast.
  • BUY, target price: US$0.88.

SECTOR CATALYSTS

  • Hospitality, retail and office REITs benefitting from reopening of the economy.
  • Limited new supply for office, logistics and retail segments in 2021.


ASSUMPTION CHANGES

  • We keep our earnings forecasts unchanged.


RISKS

  • Escalation of the Russia-Ukraine war beyond Ukraine.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-06-03
SGX Stock Analyst Report BUY MAINTAIN BUY 1.25 DOWN 1.320
BUY MAINTAIN BUY 1.48 DOWN 1.57
BUY MAINTAIN BUY 0.78 DOWN 0.820
BUY MAINTAIN BUY 2.79 DOWN 2.960
SGX Stock Analyst Report BUY MAINTAIN BUY 1.41 DOWN 1.500
BUY MAINTAIN BUY 0.83 DOWN 0.950
BUY MAINTAIN BUY 1.01 DOWN 1.070
BUY MAINTAIN BUY 0.88 DOWN 0.970
BUY MAINTAIN BUY 0.96 DOWN 1.010



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