- FTSE S-REIT Index continues to lag the STI and FTSE Real Estate developer index, dipping 0.5ppts in September. All sub-sectors were in the red, except Diversified (+1.0ppt) with Hospitality (-5.7ppts) weighing down the index.
- Dividend yield spread of 267bps is -1.1SD of 10-year average. Near-term interest rates still below 5- and 10-year historical levels, supportive of acquisitions.
- Remain OVERWEIGHT with preference on retail and industrial sectors. Catalysts expected from pick-up in the economy. SREITS under our coverage to deliver FY21e DPU yields of 3.9-8.1%. Top picks are Ascott Residence Trust (ART SP, ACCUMULATE, TP S$1.17) and Frasers Centrepoint Trust (FCT SP, BUY, TP: S$2.87).
Eleven SREITS have been added to the FTSE EPRA NAREIT Developed Index as of 17 September 2021, following the lowering of the investable market capitalisation threshold. New entrants were AIMS APAC REIT, ARA Logos Logistics Trust, Cromwell European REIT, ESR-REIT, Far East Hospitality Trust, Keppel Pacific Oak US REIT, Lendlease Global Commercial REIT, OUE Commercial REIT, Prime US REIT, SPH REIT and Starhill Global REIT. This increases the number of SREITS included in the index from 17 to 28.
A new round of tightened safe management measures will take effect from 27 September through 24 October 2021. Group sizes for gatherings and in-restaurant dining of vaccinated individuals has been reduced from five to two persons. The government will be providing a third rental support scheme (RSS) payout to eligible commercial tenants and owner-occupiers during this period of tighter restrictions. Further details on the third RSS payout will be announced in early October 2021.
To date, the government has provided a total of one month of rental relief for the two- and three-week P2HA in May and July/August. We think that third RSS payment for these four weeks will likely be another 0.5 month of rental relief. Landlords are required to provide two weeks of rental waivers for SME tenants who suffered a minimum 20% decline in revenue during the two P2HA periods, compared to the 28 December 2020 to 7 May 2021 period. Eligible tenants would have received 1.5 months of rental waivers for the P2HA periods.
Monthly retail sales value (Figure 8) year-to-July was down 3-18% compared to respective months in 2019. Monthly F&B services value (Figure 9) was more adversely hit, 17-39% below pre-pandemic levels. Rental rebates provided by landlords have been significantly lower compared to those offered in 2020. However, elevated case counts present a risk and may result in a prolonged restriction on group size and in-restaurant dining, warranting more rental rebates.
July’s hotel RevPAR grew 16% MoM on the back of a 19% increase in room rates. August data likely to be supported by the government’s quarantine business. According to the Ministry of National Development, more than 90 hotels were booked as of August 2021, up from 70 in May 2021. Sector performance contingent on the safe management measures. Uptick in cancellations and postponements expected due to the two-pax group size imposed during this September/October period of tightening.
The Vaccinated Travel Lane (VTL) kicked in on 8 September 2021, starting with Germany and Brunei. Two weeks into the scheme, Singapore has received 900 travellers, with only one COVID-19 case detected upon arrival. However, rise in local cases may deter prospective visitors and decelerate expansion of the VTL scheme.
Maintain OVERWEIGHT on SREITs
SREITs have been active on the transaction front. Portfolio reconstitution should strengthen portfolios while disbursements of divestment gains and contributions from acquisitions could help DPUs recover faster. Several REITs are exploring redevelopment and AEIs due to lower opportunity costs in this softer leasing environment. These efforts should result in faster later-period DPU growth. SREITs under over coverage are expected to deliver 3.9-8.1% FY21e DPU yields (Figure 3).
Bloomberg consensus forecasts that 10YSGS yields will remain below 2.0% from 2021 to 2022, before crossing the 2.0% level in 2023. SREITs’ DPUs should outpace interest-rate growth, providing upside for SREITS.
Sub-sector preferences: Industrial and Retail
We believe the industrial sub-sector will be resilient. Industrial REITs have been the most active in acquisitions, owing to early recovery in their share prices. We think industrial REITs will continue to lead the pack in acquisitions and redevelopment/AEIs for the rest of 2021. Continued border closures and acclimatation to online shopping have returned the RSI to pre-pandemic levels. Barring a second circuit breaker and closure of malls, we think the earnings impact on retail REITs will be marginal. Vacancy risks may be mitigated by supportive supply conditions.
Suburban malls should stay resilient regardless of the default work mode. Suburban malls are frequently located near household catchments and transportation nodes. Higher daytime populations from work-from-home arrangements should be converted to transient footfall even when work-from-office resumes, spurring incidental spending. Central malls could receive a lift when international borders eventually open. Dominant central and suburban malls which are well-located and well-managed will likely be prioritised amid retail consolidation and expansion. Prefer Frasers Centrepoint Trust (FCT SP, BUY, TP S$2.87) for its exposure to resilient, necessity-driven spending at suburban malls and growth in suburban catchments.
Lacklustre demand and downsizing will likely result in office oversupply in the near term, despite mitigation from office stock taken offline for redevelopment. Rents could remain under pressure. Still, the long-term outlook of the office market is 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 PRIME US REIT (Prime SP, ACCUMULATE, TP US$0.94) for its higher tenant exposure to New Economy STEM/TAMI sectors.
The outlook for data centres, hi-spec 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, backed by e-commerce growth. Leasing of light industrial factory space may be muted as global demand is still on the mend. The outlook for factory assets remains challenging given considerable new supply. Our top pick is Ascendas REIT (AREIT SP, BUY, TP S$3.65) for its diversified portfolio, which is positioned to capture demand from New Economy sectors.
The hospitality sector faces a long road to recovery. We estimate that the industry may only return to pre-COVID levels in 2023-24, in line with the Singapore Tourism Board’s 3-5-year recovery timeline. With one of the highest vaccination rates globally, Singapore could be one of the first to benefit from travel channels as countries progress in their vaccination programmes. Economies with sizeable domestic demand such as China, the UK, France, Australia and the US will be the first to recover, in our view. While business travel is likely to be less frequent, as companies hold business meetings virtually to save costs, some MICE demand is expected to return. This is because we think certain aspects of business engagement and networking cannot be replicated by virtual meetings. Prefer Ascott Residence Trust (ART SP, ACCUMULATE, TP S$1.19) as we expect it to make a faster recovery from its 74% exposure to countries with large domestic markets and growth in stable, long-stay assets.