SECTOR SNAPSHOT
S-REIT yield spread compressed 49bps YTD in July and registered a MoM decline of 20bps. This has dragged it further below the -1SD range – historical average is 360bps. The 10YRSGS yield currently stands at 2.46%. Rising interest rates will be a headwind for S-REITs, but can be mitigated by rental growth.
3-month SOR near 10-year highs in June. Currently at 1.60%, the 3-month SOR is near 10-year highs, and will continue to rise with another expected Fed rate hike in September. The S-REITs have been increasing their hedging activities in this regard, with an average of 78.6% of debt being hedged as at 2Q18 as compared to 77.0% in 1Q18, while keeping all-in finance costs in check at c.3%.
Retail: Tenant sales per square foot were down for 1H2018, as evidenced at both CapitaLand Mall Trust and Frasers Centrepoint Trust, underscoring subdued demand against supply which is at a 4-year high. Moody’s also attested in a July report that the onset of new retail space would further impede retail rent recovery. Retail sales (excl. motor vehicle sales) continued to be lacklustre with the Retail Sales Index remaining flat in June. Fashion was up 2.4% YoY while declines were posted by department stores, supermarkets and F&B.
Office: Office rents remain buoyant and are on an upward trajectory following its bottoming in 2017. CapitaLand Commercial Trust and Keppel REIT both reported strong rental recovery and portfolio valuations. Office capitalisation rates have been compressing despite rising interest rates, due to valuers’ assessment of recent office transactions. Upcoming supply is currently below the 10-year historical net demand of 110k sqm. Strong demand is still expected from the consultancy, technology and financial services segments.
Industrial: 2Q18 sector occupancy ticked down 0.3ppt QoQ to 88.7%. Rental Index appears to be stabilising, as it declined ‑0.1% QoQ to 91.0. Business park rents have risen 0.5% QoQ, the fifth consecutive quarter of growth and the strongest among the various industrial sub-markets. Tapering of new supply in 2018 is a tailwind for the sector, but absorption of vacant space is still slow. Ascendas REIT has made its maiden foray into Europe with the acquisition of 12 logistics properties in the UK. The REIT will also be acquiring a logistics property, Cargo Business Park, in Brisbane, Australia, for A$33.5 million (S$33.9 million).
Hospitality: RevPAR has been trending upwards YoY, up 5.7% to S$185 in June, on both higher occupancy and average room rate. YoY RevPar growth for 2QCY18 was at +4.4% while that of the listed hospitality REITs ranged from -4.1% to +6.7% YoY. Our sensing from the results briefings is that the Trump-Kim summit in June was a net negative to hoteliers as the tightened security had affected demand, as was also cited by one of the REIT Managers. The Competition and Consumer Commission Singapore (CCCS) has issued a Proposed Infringement Decision (PID) against the owners/operators of Capri by Frasers Changi City Singapore, Village Hotel Changi (owned by Far East Hospitality Trust), Village Hotel Katong and Crowne Plaza Changi Airport Hotel (owned by OUE Hospitality Trust) for exchanging commercially sensitive information from 2014 to 2015. The parties (including those who applied for lenient treatment under CCCS’s Leniency Programme) have six weeks from the receipt of the PID to make their representations to CCCS.
INVESTMENT ACTIONS
Remain NEUTRAL on the S-REITs sector
While S-REITs are currently trading below the -1SD level since the global financial crisis, strong rental growth should offset any adverse effects from rising interest rates. As such we have identified pockets of opportunities within each sub-sector that would inhibit these characteristics of healthy reversion rates and strong leasing activity.
Panning back to the S-REITs sector as a whole, we maintain Neutral on the S-REITs sector on declining tenant sales in the Retail sub-sector and slower-than-expected net absorption of Industrial space. A marked improvement in tenant sales would allow the retail S-REITs to improve occupancy levels at sustainable rental levels. However, tighter e-commerce competition and the oncoming retail supply glut would continue to weigh on retail rentals in the medium term. While Industrial rents have been stabilizing, occupancy still has some catching up to do in order to provide a meaningful catalyst for a sub-sector upgrade.
Top-down view
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 remain lacklustre, due to e-commerce competition.
Tactical bottom-up view (unchanged)
For investors with concerns on rising interest rates, look for REITs with:
……such as CapitaLand Retail China Trust (ACCUMULATE, TP:S$1.66), Frasers Logistics & Industrial Trust*, Keppel DC REIT (ACCUMULATE, TP:S$1.45), and Keppel-KBS US REIT*
* Currently not under PSR coverage
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
