Singapore REITs Monthly – February 2020 February 11, 2020 360

  • FTSE S-REIT Index gained +4.0% MTD and +4.1% YTD. Strongest gains were from the healthcare sub-sector (+6.1%) and weakest showing at the hospitality sub-sector (-3.5%).
  • Performance in August: Best performer – Ascendas REIT (+10.4%), Worst performer – Far East Hospitality Trust (-10.0%).
  • Sector yield spread of 248bps over the benchmark 10-year SGS (10YSGS) yield was at the -1.5 standard deviation (SD) level.
  • 3M SOR inched up 10bps MoM, to end at 1.62%, which was 36bps lower YoY Remain NEUTRAL on S-REITs sector. Sub-sector preferences: Office and Industrial.

 

SECTOR SNAPSHOT

S-REIT yield and yield spread were 418bps and 248bps (-1.5 SD level) respectively. The lower yields were driven by the 105pts YoY increase in the FTSE S-REIT Index which ended at 943pts. The 10YRSGS was 4 bps lower MoM while the 3M SOR inched up 10bps MoM, to end at 1.62%, which was 36bps lower YoY.

Hospitality (-4.1% MoM) S-REITs were sold down in light of the Novel Coronavirus outbreak as investors fled to Industrial REITs (+4.5% MoM).

Fresh into 2020, SREITs sector saw the proposed merger of CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) which if approved by shareholders, will result in the new CapitaLand Integrated Commercial Trust (CICT) which will have a market capitalisation of S$16.8bn and AUM of S$22.9bn.

Elite Commercial REIT debuted on the SGX on 6th February with a portfolio of 97 commercial building across the UK. 99% of gross rental income (GRI) is derived from leases to the UK government’s Department of Work and Pensions. Elite listed with a Forecast Year 2020 dividend yield of 7.1% and was 3.2x and 8.3x subscribed by the institutional and retail tranches respectively. The appraised value of the IPO portfolio is GBP319mn (S$571mn).

Singapore remains an attractive market for REITs listings with several IPOs lined up. Hampshire US REIT will be lodging their prospectus in February 2020 with a portfolio of 18 grocery and self-storage assets worth US$882mn (S$785mn).

 

Outlook

Office – Office occupancy was flat QoQ but improved 1.6ppts YoY while the office rental index moderate in 2H19 after 16 consecutive quarters of growth. Positive rental reversions are still expected for the office sector which typically follows a 3-year leasing cycle (Figure 5) as passing rents are currently below market rents.

Industrial – Industrial rents have been bottoming out over the past 16 quarters while occupancy remained stable at 89.3%. Of the 4.4% of supply coming onto the market in FY20, 70% of supply will be coming from the light industrial segments and will put pressure on rents and occupancy. However, 50% of the light industrial supply are build-to-suit assets and are pre-committed.

Retail – Despite a weak retail sector outlook with the RSI EX. MV in the red for the most of 2019 and considerable retail supply coming onto the market (Funan, Jewel, Paya Lebar Quarter), the retail index climbed 2.9% with industry occupancy improving a 100bps YoY to 92.5%. 70,000sqm of supply coming onto the market in 2020 and 2021, representing a 1.2% increase in retail stock. Most of the retail supply hitting the market are part of mixed-use developments with <10,000sqft of retail space, hence indirectly competing against suburban malls in those locations.

Hospitality – Low supply of rooms hitting the market over the next 3 years bodes positively for the SG hospitality sector. Room supply is expect to grow by 1.1%/1.0% in FY20/FY21. The muted supply in 2019 saw RevPAR improving 9.1% on the back of higher room rates and occupancy, which improved 3.6% and 45bps YoY. However, the evolving Novel Coronavirus epidemic will thwart the supply tailwinds.

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Natalie Ong
Research Analyst
Phillip Securities Research

Natalie covers the REITs and Property sector. Previously a business analyst with a management consultancy, she handled feasibility studies and business optimisation and restructuring projects. She has worked with companies from varied industries including logistics, FinTech, EduTech, gaming, F&B and retail. She graduated with a Bachelor of Science (Honours) in Banking & Finance from the University of London.

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