SECTOR SNAPSHOT
S-REIT yield spread declined 42bps YTD in January. The S-REIT yield spread dipped back down below the -1 standard deviation (SD) level as at end-January. The 10YRSGS yield rose 10bps MoM, to end at 2.14%.
3-month SOR continues its ascent. Hitting 1.91% in January, the 3-month SOR is close to double what it was a year ago. While the Federal Reserve did not make any changes to its interest rate policy during its January meeting, Chairman Jerome Powell mentioned that “the case for raising rates has weakened somewhat”.
Retail: Weak tenant sales growth still continue to weigh down on rental reversions. Tenant sales ticked up slightly YoY in 4Q18 for CapitaLand Mall Trust (CMT) while that of Frasers Centrepoint Trust (FCT) remained flat YoY in 4QCY18. No notable improvement in average occupancy cost YoY for both CMT and FCT in FY18, though this figure has crept up over the years – 18.4% in FY18 from 17.6% in FY14 for CMT and 16.6% in FY18 from 15.3% in FY15 for FCT. Tenant mix re-configuration is key to boosting tenant sales and footfall. Retail sales (excluding motor vehicle sales) declined 3% YoY in December, with declines seen in all segments save for the medical goods & toiletries segment.
Office: Central office rents continued its upward trajectory to end the year at 181.4 pts (+13.3pts YoY) in 4QCY18. Overall occupancy remained stable at 87.9%, with demand still coming on strong from the banking & financial services, business consultancy and real estate and property services segments. Above 98% occupancy for the office REITs, well above the average central office occupancy of 94.8%. Co-working space operators continue to be a burgeoning source of demand – in 2018, the introduction of co-working operator The Work Project Kingdom (TWPK) (which CapitaLand owns a 50% stake in) was the main booster of occupancy at Asia Square Tower 2 (98.1% in 3Q18 vs 91.9% in 2Q18).
Industrial:
Industrial rents remained flat YoY in 4QCY18 while occupancy inched up slightly, driven by the single-user factory and warehouse segments. Tapering supply of space continues into 2019, but tepid industrial activity is keeping our expectation tempered. Rental reversions during the quarter were generally negative. Tenant optimism in 2H 2018 was lower than in 1H, as they started to taper expansion plans. The general sentiment has been more subdued in 2H 2018 compared to 1H. According to The Business Times, Google is understood to be in advanced talks to lease close to 400k sqft at Alexandra Technopark.
Hospitality: Average RevPAR for 2018 rose 3.5% YoY, reversing the negative YoY growth recorded in the past five years (save for 2014: +0.3%). The luxury segment saw the strongest RevPAR growth of +5.9% YoY, closely followed by the +4.7% growth recorded by the economy segment. According to one of the Hospitality REIT managers, the reason for the latter is likely to have been the increased number of stopovers in Singapore coming from the cruise segment – total cruise passenger throughput increased 35% YoY, majority of which stem from India. RevPAR for the Singapore portfolio of the listed REITs were resilient, with the boost stemming mostly from higher occupancy rates than from growth in average room rates. Both transient and corporate demand were resilient, with the latter being supported by the ASEAN summit held in 2018. In addition, the Oakwood Premier OUE Singapore has been the latest serviced residence to obtain a hotel license, joining the likes of Ascott Orchard and Ascott Raffles Place.
INVESTMENT ACTIONS
Remain NEUTRAL on the S-REITs sector
While the S-REIT yield spread is currently below the -1SD level since the global financial crisis, strong rental growth should offset any adverse effects from rising interest rates. The Fed’s dot plot median projections are for two rate hikes in 2019. While higher interest rates are typically negative for the sector, it does not imply a bear cycle, provided the REITs can grow their rents faster – our estimates: by -1% to 5.3% – than the rise of their interest expenses (which can also be managed via fixed debt or interest rate swaps) or manage their capital structure for acquisitions
We maintain Neutral on the S-REITs sector, with selective sub-sector preferences.
Top-down view (unchanged)
We like the Commercial and Hospitality sub-sectors due to tapering supply after the surge in supply in the prior two to three years. We are cautious on the Retail sub-sector as retail sales and shopper footfall both leave much to be desired.
Tactical bottom-up view (unchanged)
REITs that can better weather through the rising interest rate environment would be those with:
1) Low gearing; 2) High-interest coverage; 3) Long weighted average debt to maturity; and
4) A high proportion of debt on fixed interest rates
……such as CapitaLand Commercial Trust (ACCUMULATE, TP:S$1.93) and Keppel DC REIT (ACCUMULATE, TP:S$1.52).
Figure 1: S-REITs under our coverage
Source: PSR
1 Covered by PSR under the ‘SGX Stockfacts’ scheme
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
