Survival of the fittest

17 May 2021

STI : 3,055.02
Derek TAN +65 6682 3716 Rachel TAN +65 6682 3713
Dale LAI +65 66823715 Geraldine WONG +65 6682 3719

• Near-term pain from stricter communal measures
for the long-term good of the community
• Share prices have reacted and are now close to the
peak-to-trough declines back in 2H20 (phase 2)
• Buy on further dips; investors should position to
gather REITs within the structural growth themes of
logistics, suburban retail and grade A offices

Turning buyers on further near term weakness. The
introduction of stricter measures to effectively curb the
community spread of COVID-19 will likely bring communal
gatherings to a near-term standstill. In fact, we believe that the
recent measures targeting social gatherings appear to be
stricter than those implemented back in phase 2 (Jun’20-Dec’20)
and should be effective. S-REIT share prices have de-rated in
response. That said, while average share prices are c.15%
higher (for office, retail and hospitality S-REITs) compared to the
lows in Oct’20, we believe that YTD declines of c.8-9% are within
c.3% of the declines (peak-to-trough) seen back in Phase 2. With
average sector yields at c.6.0% (yield spread of 4.5% vs 10-year
bond), we believe that believe that prices are approaching a
near term bottom and should see support soon.

Opportunity to gather structural growth names. We are
net-buyers in the recent sell-off and seek resilient performers
and those that remain within the structural growth themes of
industrial (logistics, data centres) which are undisrupted post
COVID (FLCT, MLT, ALLT) while suburban retail landlord (FCT)
has proven to be resilient given its exposure to essential trades
and benefit from the work-from-home (WFH) trend. We believe
that concerns on office landlords (MCT, KREIT) are overdone as
occupiers are unlikely to further tweak their operational layout
with most major of the space rationalization unveiled. Within
hospitality, while our optimism is doused somewhat given
expected delays in Air Travel Bubble (ATB), we seek shelter in
FEHT for the high revenue support from its master lease,
offering a c.4.0% yield.

Potential risks. Our views are premised on a short and sharp
“lockdown” curbing the effective community spread. Potential
downside risk if the (i) economy double dip into a recession in
2021, resulting in widespread business closures, (ii) mandatory
mall closures which result in landlords needing to provide
extended reliefs to their tenants.