SECTOR SNAPSHOT
S-REIT yield spread declined 30bps YTD to 263bps as at end-September at the -1.3 s.d level. Although still below the -1s.d. level, this is a recovery from the 226bps (-67bps) low in May 2019. The S-REIT dividend yield was 4.38% as at 20 September 2019.
3-month SOR has fallen 29bps YTD to 1.68% while the 10YRSGS yield fell 39bps YTD to 1.74%. The lower interest rate environment is conducive for REIT in terms of lower cost of borrowings which makes acquisitions more accretive. The greater investor appetite for yield instruments has also resulted in the oversubscription of private placements ranging 1.2x to 9.3x, despite high P/NAVs valuations. Since the start of 2019, REITs have raised S$3,171mn (figure 1) through equity fund raising (2018: S$4.3bn), predominantly to finance asset acquisition. Ascott Residence Trust (ART) has also reaped cost saving of c.S$1.68mn p.a. by replacing S$150mn 5% callable perps with S$150mn 3.88% callable perps. Including the S$2,038mn (figure 2) raised through the fixed income markets, a total of S$5,209mn has been raised by REITs in 2019.
September saw asset acquisitions by three SREITS. The dual acquisition of KDC4 and 1NN by Keppel DC, a pivotal acquisition of 13 data centers by MapleTree Industrial Trust that will increase the DC proportion in the portfolio from 9.1% to 31.5%, as well at the acquisition of 400 Capitol in Sacramento by Manulife US Trust.
Frasers Centrepoint Trust and Keppel DC REIT will be admitted into the FTSE ERPA NAREIT Developed Index while MapleTree Commercial Trust will join the Straits Time Index, effective 23 September 2019.
Lendlease Global REIT lodged their prospectus with MAS on 16 September 2019 to raise c.S$1,027.8mn from the IPO, of which 38.8% and 27.2% has been subscribed by cornerstone investors and the Sponsor respectively. The IPO has an offering price of S$0.88 per unit. The initial portfolio will comprise of a 99-year leasehold retail mall in Singapore (313@Somerset) and a Sky Complex, a freehold office asset located in Milan, Italy. The appraised value of the diversified portfolio is c.S$1,405.3mn. Sponsor, Lendlease Corporation, is part of the Australian Securities Exchange-listed Lendlease Group. The REIT has a global mandate and ROFR assets.
Retail: Retail sales (excluding motor vehicle sales) declined -2.5% YoY in July, on a seasonally adjusted basis, The RSI (excl. MV) growth has been in the red since the start of 2019. July’s figures were dragged down largely by the furniture & household equipment (-8.2%) and the computer & telecom equipment (-7.9%) sectors. The F&B index was up +3.9% YoY (seasonally adjusted) in July.
Hospitality: The SG hospitality segment was expected to benefit from the tapering room supply coming onto the market (2019-2021 CAGR: 1.5% vs 3-year historical CAGR: 4.4%). However, recovery this was dampened by the absence of biennial events in the first half of 2019 and weaker economic outlook due to the US-China trade uncertainty.
The hospitality sector was off to a promising start 2H19. July saw visitor arrivals increase 4% YoY. Average RevPAR improved 1.8% YoY in July on the back of higher average room rate (ARR) and occupancy. All segments recorded RevPAR growth, with the mid-tier sector coming in highest at +6.3% and luxury bringing up the rear at +1.3%.
INVESTMENT ACTIONS
Remain NEUTRAL on the S-REITs sector, with selective sub-sector preferences.
Strong rally in prices due to the dovish stance communicated by the FED has resulted in the FTSE S-REIT index return gains of 22.0% YTD. Most of the upside from the lower interest rate stance have been priced in, with many REITs trading at rich valuations (+2 std. dev. P/NAV). The P/NAV is supported by investor’s appetite for yield instruments. The current interest rate environment is conducive for REITs, which have been busy with acquisitions and equity fund raising, as well as terming out loan maturities to lock in the lower interest rates.
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 due to the softer retail outlook as seen by the weaker retail sales index.
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
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