S-REIT yield spread narrowed 10bps YTD and widened 37bps MoM to 282bps as at mid-November, at the -0.96s.d level. Currently, the spread is marginally above the -1s.d. level, this is a recovery from the 226bps (-56bps) low in May 2019. The S-REIT dividend yield was 4.58% as of 15 November 2019.
3-month SOR has fallen 46bps YTD to 1.51% while the 10YRSGS yield fell 37bps YTD to 1.76%. The lower interest rate environment is conducive for REITs in terms of the lower cost of borrowings that enable for more accretive acquisitions. The huge investor appetite for yield has resulted in the oversubscription of private placements ranging 1.2x to 13x, despite high P/NAVs valuations. Since the start of 2019, REITs have raised S$4,737mn (Figure 1) through equity fundraising (2018: S$4.3bn), predominantly to finance asset acquisition. Including the S$2,869mn (Figure 2) raised through the fixed income markets, a total of S$7,606mn has been raised by REITs in 2019.
CapitaLand Limited, City Developments Limited (CDL) and Ascott Residence Trust (Ascott Reit) said they will together redevelop the Liang Court site. The site comprises Liang Court mall, midscale hotel Novotel Singapore Clarke Quay and serviced residence Somerset Liang Court Singapore. CDL Hospitality Trusts (CDLHT) has proposed to sell its entire stake in Novotel Singapore Clarke Quay to the 50:50 CDL-CapitaLand joint venture (JV) entities and CDL. Simultaneously, Ascott Reit will sell part of its interest in Somerset Liang Court to CDL. The proposed project will comprise of two residential towers offering some 700 residential units, a commercial component, an “upper midscale” hotel with 460 to 475 rooms, and a 192-unit serviced residence with a hotel licence. The residential and commercial components will be owned by the 50:50 CDL-CapitaLand JV entities, while the serviced residence will be owned by Ascott Reit, which is a wholly-owned subsidiary of CapitaLand.
Ascendas REIT (AREIT) announced its proposed acquisition of 30 business park properties in the United States and Singapore from Capitaland for S$1.66 bn. The acquisitions will boost AREIT’s investment in the business and science park segment by 46% to $5.4 bn. The segment will constitute 42% of its total asset value of $12.8 bn. The proposed acquisitions are expected to generate a first-year net property income yield of about 6.3% post-transaction costs.
SPH REIT announced the acquisition of a 50% stake in Australian shopping mall Westfield Marion Shopping Centre for A$670mn. The acquisition will be funded through a combination of perpetual securities, equity fund-raising and debt.
Outlook for the quarter ended 30 September 2019
Office: According to CBRE, office demand was pressured amidst fears of weaker global growth. Coupled with a mismatch in rental expectations between occupiers and landlords, leasing activity was more measured. While majority of the new leasing volumes in Q3 was contributed by large agile space players, growth in the sector is slowing. Outlook for the office market is likely to remain challenging, but the tapered supply pipeline over the next 3 years should provide some level of support.
Hospitality: Coming from a weaker 2Q, a cyclical uplift can be seen in 3Q as visitor arrivals grew 3.3% YoY, driven by a better performance from the F1 Grand Prix this year. RevPAR grew 5.6% YoY, as average room rate and average occupancy rate rose 3.2% and 2.0% YoY respectively. For 3Q, demand slowed in terms of discretionary corporate travels, and hotels were impacted by weaker transient volumes. However, the SG hospitality segment is still expected to benefit from the tapering room supply coming onto the market (2019-2021 CAGR: 1.5% vs 3-year historical CAGR: 4.4%).
Retail: Retail Sales Index Ex. Motor Vehicle (RSI Ex. MV), SG retail sales continued to face pressures in September as it fell for the 10th straight month by 0.2% YoY, driven mainly by a decline in the sale furniture and household equipment (-8.9%), recreational goods (-6.1%) and watches and jewellery (-4.4%). In contrast, the F&B index was up +4.9% YoY (seasonally adjusted) in September.
Industrial: Business parks remain resilient as vacancies across the submarkets compressed, strengthened by the lack of speculative new stock and limited supply. While some of the newer developments saw improving rental rates, the general performance of business parks was offset by rental weakness in the older buildings. Amidst global trade tensions and slowing economic growth, leasing activity of industrial buildings were subdued, mainly contributed by relocations and renewals. Overall industrial rental values may continue to be muted moving forward.
Remain NEUTRAL on the S-REITs sector, with selective sub-sector preferences.
The strong rally in share prices due to the dovish pivot the Fed has resulted in the FTSE S-REIT index return gains of 23.0% YTD. Most of the upside from the lower interest rate has 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 fundraising, 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)
We continue to favour REITs with the following attributes:
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