S-REIT yield spread declined 69bps YTD as at end-April. The S-REIT yield spread dipped further below the -1 standard deviation (SD) level as at end-April, at 241bps. The 10YRSGS yield rose 10bps MoM, to end at 2.17%. The FTSE S-REIT Index ended 6bps lower MoM, at 4.58%. SREIT dividend yield is inching close to record lows.
3-month SOR inched back up, to 1.97% as at end-April from 1.93% at end-March.
ARA US Hospitality Trust, a pure-play US upscale select-service hospitality trust, debuted on the SGX on 9 May 2019. It has forecasted an indicative yield of 8.0% for FY2019. Share price is now trading at 1.1% discount to IPO issuance price.
Retail: Reversions across the board for the Singapore retail portfolio have been muted at an average of c.2%, in sync with the continued decline in tenant sales growth. This will also continue to place pressure on occupancy cost. Both the rental index and occupancy declined YoY to 98pts and 91.3% in 1Q19, respectively. Fringe retail median rents are however playing catch-up to central median rents (figure 5), boding well for the suburban malls. Retail sales (excl. motor sales) in Singapore continued to take a hit, at -1.5% in March (-2.4% on a seasonally adjusted basis), weighed down by largely by optical goods & books, computer & telecom equipment and watches & jewelry (-4.7%).
Office: While growth has stalled, office rents continued to maintain its upward trajectory, up 7pts YoY in 1Q19. Occupancy also edged up slightly to 88.2% in 1Q19. Central office rents are seeing a slight improvement in 1Q19 while fringe office rents held steady YoY. Healthy reversions are still expected to be clocked as committed rents are higher than current expiring rents. Office transactions have still been buoyant with the property price index at a 21-year high, up 10pts YoY in 1Q19, upheld largely by central office prices.
Industrial: Industrial rents and occupancy remained flat YoY in 1Q19. Business parks was the only segment that reported positive (+1.3%) growth in rents YoY in 1Q19. Similarly, industrial prices have been flat across the board in 1Q19.
Hospitality: RevPAR across the Singapore hotels portfolio were generally weaker in 1Q19. There has been an absence of biennial Singapore Airshow and events related to the ASEAN Chairmanship in 2018. This was captured in the average RevPAR in Singapore, which declined 6% YoY in March on both lower occupancy and average room rates. Visitor arrivals however recorded a strong 13% growth YoY in March. In addition, the URA maintained status quo on its ruling on short-term accommodations in Singapore. The minimum stay duration for private residential properties remains at three months. This will provide a relief to the hotels and serviced residences in Singapore, with the latter also attempting to attain hotel licenses.
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 – with the 3M SOR still rising despite the Federal Reserve’s recent dovish stance.
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