Singapore REITs Monthly – Ready for the next phase July 14, 2020 1099

  • FTSE S-REIT Index gained +8.2% MoM in May. The largest gains were observed from the healthcare and industrial subsector (+0.1%) while weakest performance was in the hospitality subsector (-9.3%).
  • Sector yield spread of 361bps over the benchmark 10-year SGS (10YSGS) yield was at the +0.19 standard deviation (SD) level.
  • The quarter ending June 2020 will register the full impact from the containment measures, but a recovery is underway. Maintain OVERWEIGHT on SREITs sector with sub-sector preferences in Office and Industrial portfolios.



As mentioned in our previous report (Re-rating for SREITs), we are expecting acquisition momentum for REITs to pick up in this conducive environment, supported by higher leverage limits, lower interest rates and recovery in share prices. There has been a gradual pick-up of acquisition momentum since mid-June.


Mapletree Logistics Trust announced its S$20.2mn acquisition of a Grade A logistic facility in Brisbane on 15 June 2020. On 30 June, Frasers Centrepoint Trust (FCT) announced the acquisition of the remaining 12.07% stake in PGIM Real Estate AsiaRetail Fund (PGIM ARF) for S$197.2mn, bringing the Frasers Group’s total stake in PGIM ARF to 100% – a step closer to the goal of injecting PGIM ARF’s assets into FCT’s portfolio. A day later, Ascendas REIT announced the acquisition of a logistics asset under development located in Sydney, Australia for S$21.1mn, 19.8% lower than the “as if completed” market valuation of the property. Meanwhile, Cromwell European REIT announced its 50% stake in 2 European data centre assets on 13 July.


Phase 2 of reopening will relieve pressure on the Hospitality and Retail sectors

Singapore entered Phase 2 on 19 June 2020, with retail businesses allowed to reopen and F&B operators allowed to accommodate dine-in customers. Central malls which have suffered a double whammy from a telecommuting workforce and absence of international visitors have benefitted from the resumption of retail trade. We understand from SPH REIT’s business update that close to 100% of tenants in Paragon, located along the Orchard Road shopping belt, are trading, with a handful choosing not to trade as they expect to benefit from the enhanced rental relief for SMEs.

As Singapore progresses further into Phase 2 of reopening, more trade categories and activities are allowed to resume business, subject to various safe management measures. Cinemas are allowed to open from 13 July, with up to 50 patrons while hotels may apply to reopen for staycation bookings from 3 July.

Pent-up travel demand and occasion-driven staycationers (anniversaries, birthday celebrations) will help to fill the mid, upscale and luxury vacancies, however, we are expecting hoteliers to give significant discounts to achieve the sweet spot. Nonetheless, the reopening for staycation booking is still positive for the hospitality sector.



Maintain OVERWEIGHT on the S-REITs sector

We continue to view REITs as a stable yield investment. We believe that SREITs may emerge stronger will more future-ready portfolios, resulting in a re-rating of the SREITs sector due to:

  1. Acceptance of higher gearing levels will benefit REITs
  2. COVID-19 accelerated phasing-in of future trends, creating opportunities for landlords
  3. Tried and tested – REITs remain an attractive yield play
  4. A better entry price – S-REIT yield spread at the -0.6 SD level
  5. Recovery in prices and low interest rates presents conducive environment for acquisition


Top-down view (unchanged)

We like the Commercial and Industrial sub-sectors due to tapering office supply after the surge in supply in the prior two to three years, and the AEI and redevelopment opportunities for the Industrial sector. The tenants in these two sectors are also less affected by the COVID-19 outbreak. We are cautious on the Hospitality and Retail sub-sector due softer tourism sentiment and retail outlook, exacerbated by lingering fears of another wave of COVID-19 outbreak.


Tactical bottom-up view (unchanged)

We continue to favour REITs with stability, diversification as well as near-term growth catalyst. REITs that can better weather through the weaker leasing environment and structural shifts are those with:

1) Well-distributed lease expiries 2) High-interest coverage; 3) Long weighted average debt to maturity; and 4) percentage of guaranteed revenue through “fixed” or “stable” leases.




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