SECTOR SNAPSHOT
S-REIT yield spread declined 47bps YTD and 21bps MoM to 245bps as at mid-October, at the -1.5 s.d level. Although still below the -1s.d. level, this is a recovery from the 226bps (-19bps) low in May 2019. The S-REIT dividend yield was 4.14% as at 20 October 2019.
3-month SOR has fallen 40bps YTD to 1.57% while the 10YRSGS yield fell 44bps YTD to 1.68%. 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$4,074mn (figure 1) through equity fund raising (2018: S$4.3bn), predominantly to finance asset acquisition. Including the S$2,519mn (figure 2) raised through the fixed income markets, a total of S$6,589mn has been raised by REITs in 2019.
Keppel REIT announced the divestment of Bugis Tower for S$547.5mn (contributes 6.6% of NPI), at a 6.3% premium to the latest valuation conducted on 8 August 2019. The proposed divestment comes at the 22-year high of the commercial property market and the sales price translates to an exit yield of 3%.
MapleTree Commercial Trust (MCT) announced the acquisition of MBC Phase II comprising four blocks of business park space (MBC 50, 60, 70 and 80) which are located adjacent to MCT’s existing MBC I. With a NPI yield of 5%, the acquisition of MBC II will increase AUM by 20% and further entrench MCT’s presence in the Greater Southern Waterfront area.
Coworking operator WeWork and its backers, JPMorgan Chase&Co and SoftBank Group, look to debt markets to rescue the company after failed IPO. JPMorgan’s proposal seeks to raise US$5bn that could include a US$2bn pay-in-kind bonds yielding 15%.
Retail: Retail sales (excluding motor vehicle sales) declined -1.1% YoY in August, 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 (-9.9%) and the watches & jewellery (-8.4%) sectors. The F&B index was up +2.9% YoY (seasonally adjusted) in August.
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. Room rates finally showed some strength, increasing 2.8% to 8.5% across the four room tiers.
The hospitality sector was off to a promising start 2H19. August’s visitor arrivals increase 3.1% YoY (July 4.0%). Room rates finally showed some strength, increasing 2.8% to 8.5% across the four room tiers. Average RevPAR improved 4.9% YoY in August, on the back of higher average room rate (ARR) and occupancy. All segments recorded RevPAR growth, with the economy sector coming in highest at +9.6% and luxury bringing up the rear at +2.1%.
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 25.9% 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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