• STI and FTSE ST Real Estate Holding and Development Index trading close to FTSE S-REIT Index, as investors rotate to cyclical sectors to tap recovery prospects. All sub-sectors in the green except Healthcare (-0.1%). Office (+8.5%) the biggest gainer.
• Rising interest rates indicative of a recovering economy but will hurt REITs. Near term, we expect further interest rate growth to be capped. DPUs to stay in excess of interest-rate growth, providing upside for SREITS.
• Remain OVERWEIGHT with selective sector preferences. Catalysts expected from pick-up in economy activity. SREITs expected to resume DPU growth. REITS under our coverage expected to deliver FY21e DPU yields of 3.6-8.8%. 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$3.64).

SECTOR ROUND-UP

Retail

Singapore introduced a Fair Tenancy Framework for retail tenancies on 26 March 2021. Mandatory guidelines and best practices have been provided in a Code of Conduct, governing lease covenants and lease terms such as security deposits, rent structures, pre-terminations and electricity, advertising and promotion charges. Leases initiated from 1 June 2021 onwards must comply with these, though the Code will not be applied retrospectively.

Standardisation of contract terms will not have a significant impact on retail REITs. The guidelines are largely administrative in nature, with the exception of the guidelines on electricity charges. It is a common practice for landlords to purchase electricity in bulk from grid providers at wholesale prices and charge tenants commercial rates. This allows landlords to earn a margin on electricity charges. Under the Code, electricity must be charged to tenants on a pass-through basis without any mark-up. Alternatively, tenants must be allowed the option to buy their power from open electricity market retailers.

February 2021’s RSI growth ex-motor vehicles turned positive (+3.5%) for the first time in 13 months. This was aided by Chinese New Year celebrations. Jewellery & watches (+37%) and apparel (+19%) led the growth. Computer & telecommunication equipment (+20%), furniture & household (+17%) and recreational goods (+15%) also continued to grow YoY. 

Central malls are expected to receive a shot in the arm from returning office crowds following a further relaxation of workplace capacity limits from 50% to 75% on 24 March 2021. That said, weaker leasing demand and lower rents may persist for some time as tenants rationalise costs. Dominant central and suburban malls which are located near transport nodes are likely to be prioritised when retailers consolidate stores.

Office

DBS is in discussions to give up two and a half floors totalling 75,000 sq ft or 10.7% of its current space in Tower 3 of the Marina Bay Financial Centre (MBFC 3) in December. This comes three years ahead of the expiry of its 12-year lease for 700,000 sq ft of space on 22 floors, signed in December 2012. MBFC 3 is jointly owned by Keppel REIT (KREIT SP, Not rated), DBS (DBS SP, Accumulate, TP S$29.50) and Hongkong Land (HKL SP, Not rated).

DBS joins the likes of Citigroup, Mizuho Financial Group and Sompo Insurance in cutting their office footprints in the aftermath of the pandemic. Citigroup will be trimming its office space when its 10-year lease expires soon. Amazon will take up the three floors with 90,000 sq ft of space that Citigroup is relinquishing. Mizuho will trim about 16,800 sq ft in Asia Square Tower 2, while Sompo Insurance has cut 40% of its 26,000 sq ft office space at Singapore Land Tower. AXA will be looking for a smaller office to relocate to due to the redevelopment of AXA Towers, where it currently occupies 70,000 sq ft.

The office market will likely face some leasing pressure from downsizing in favour of hybrid or remote working, notwithstanding some demand support from displaced tenants from AXA Tower and Fuji Xerox which will be undergoing redevelopment, and overseas tech tenants.