• FTSE S-REIT Index inched up 2.9ppts in June, narrowing its gap with the STI and FTSE ST Real Estate Holding and Development Index. All sub-sectors in the green, led by Hospitality (+3.5%).
• Dividend yield spread of 249bps is -1.4SD of 10-year average. Deal momentum persisted. Near-term interest rates still below 5- and 10-year historical levels, supportive of acquisitions.
• Remain OVERWEIGHT with selective sector preferences. Catalysts expected from pick-up in economy. SREITs expected to resume DPU growth, potentially delivering FY21e DPU yields of 3.9-8.6%. Prefer Retail and Industrial. Top picks are Manulife US REIT (MUST SP, BUY, TP US$0.84) and Ascendas REIT (AREIT SP, BUY, TP S$3.65).

SECTOR ROUND-UP

Deal momentum spilled into June with hospitality and retail REITs also getting into the action. Ascott Residence Trust (ART SP, Accumulate, S$1.17) acquired three Japan rental-housing assets for S$85.2mn, or an EBITDA yield of 4%. It also bought a 45% stake in a student accommodation in South Carolina, US. The remaining 45%/10% stakes will be held by sponsor Ascott Limited (not listed) and an unnamed US student-housing developer. The development costs S$146.2mn and carries an EBITDA yield of 6.2%. Elsewhere, Lendlease Global REIT (LREIT SP, Accumulate, S$0.82) will raise its holding in integrated office and retail property, JEM, from 3.75% to 31.8%. Prime US REIT snapped up two office towers in San Diego and Florida for US$245.5mn.

NYSE-listed Digital Realty Trust Inc (DLR US, Not Rated) is evaluating a data-centre REIT IPO in Singapore, potentially by year-end. The IPO could raise US$300-400mn, backed by a geographically diversified portfolio of 10 assets. This brings the number of potential REIT IPOs in 2021 to three. City Developments (CIT SP, Buy, S$10.68) and unlisted Mapletree Investments are also mulling REIT IPOs.

As of 25 June 2021, 53% of the Singapore population had received at least one dose of COVID-19 vaccines. Another 36% had received two doses. The government has ramped up vaccination capabilities. From 26 June, Singapore will be able to administer up to 80,000 doses daily, a 70% increase from its previous 47,000. Singapore aims to vaccinate two-thirds of its population fully by National Day on 9 August. It is, moreover, considering allowing larger gatherings and COVID-19 testing in lieu of stay-home notice for vaccinated travellers. Vaccinations so far appear to be effective in containing rates of infection, transmissions and the severity of disease in individuals who contract the virus after vaccination.

Retail

Shopper footfall thinned after Phase 2 Heightened Alert on 16 May 2021. Restrictions included a ban on dining in, work-from-home as the default and two unique household visitors per day. These measures hurt downtown malls more than heartland malls, which have the benefit of close proximity to household catchments. While group sizes have been increased from two to five since 14 June and 2-pax in-restaurant dining has been allowed since 21 June, the uplift is expected to be muted as lunch and dinner gatherings involving more than 2 persons will likely take place at home.  

The government has enhanced its Job Supports Scheme to help retailers affected by Phase 2 Heightened Alert. From 16 May to 13 June 2021, F&B and gyms will receive 50% of wage support. Retail stores, cinema operators and affected personal care services will be given 30%.

As part of Phase 3 Heightened Alert, F&B and gym operators will receive 10% wage support from 21 to 30 June 2021.

May’s retail sales index was -7.3% below 2019 levels. The F&B index was down 17.5%. Consumer spending has normalised at these levels since the pandemic. The rental index slipped 16.5% YoY in 1Q21 but vacancy improved to 8%, -0.5ppt shy of 1Q20 levels. We think that retail rents have bottomed. Still, given a 3-year rent cycle, negative reversions in the mid-single to mid-double digits can be expected as leases expire over the next 12 months. 

During the pandemic, major landlords had established e-store and food-delivery platforms to provide tenants with online channels to capture retail spending. Support from landlords will be more targeted and operational going forward, instead of outright rental rebates. It may come in the form of advertising, promotions and waivers of listing, delivery and service charges for purchases made through their e-commerce platforms. The support is expected to lower sales and fulfilment costs for tenants as well as help malls keep consumer spending within their ecosystems.

Hospitality

May’s hotel RevPAR fell 23% MoM on cancellations and postponements due to the two guest limits imposed during the Phase 2 Heightened Alert. YoY, it grew 58% from a low base. RevPAR of S$61 was 68% below the 2019 average as borders remained closed to leisure travel. Singapore hoteliers will receive 30% wage support from April to June 2021, which will taper off to 10% from July to September 2021.

Near-term catalysts for the sector could include a substitution of COVID-19 testing for stay-home notice for vaccinated travellers. This is expected to provide a shot in the arm for business travel.