S-REITS maintain strength as DPU set to grow 2% in 2020
Gearing fell to 36.9% in Q4 with only 13% of debts tipped to mature in 2020, insulating the sector from interest rate hikes.
S-REITS have outperformed FSSTI index, rising 7.4% in February, led by the large and selective mid-cap S-REITS.
“We continue to like S-REITS as we expect their share prices to continue outperforming the broader market in the more benign interest rate environment,” CIMB said in a report. The firm maintains CDL Hospitality Trust (CDLHT) as its top pick for the subsector as it is a bellwether for Singapore’s hospitality stocks. “We project a stronger DPU growth of 2.5% in 2019F (vs. 0.4% in 2018), driven by the reopening of its repositioned Dhevanafushi Maldives Luxury Resort, completion of AEI in Orchard Hotel, a full year’s contribution from Hotel Cerretani Florence, Italy, and a recovery in the hotel industry in Singapore.”
Office spot rents continue to rise, filtering sentiments to the business parks segment. Most office S-REITS reported positive rental reversion, in tandem with the rising spot market, boosting average portfolio rents. There were stronger positive reversion for retail S-REITS as rental reversions were encouraging. SPH REIT delivered the strongest rental reversion of 9.7% in September to November, followed by Frasers Commercial Trust (6.9% in 4Q18) and Vivocity (4% in April to December 2018). Meanwhile, the hospitality REITS reported more encouraging REVPAR performance thanks to strong demand and easing competition.
Industrial S-REITS’ DPU growth was driven by contributions from new acquisitions and Asset Enhancement Initiative (AEI) completions. Supply in the next three years remains tight, especially for business parks. Older and lower specification properties are still experiencing occupancy weakness as the flight to quality continues. Rental reversions generally remained negative as REITS continue to have lower pricing power as they focus on filling up vacancies.
Over at the retail front, although tenant sales were generally positive for the REITS, tenant sales growth, lagged behind shopper traffic growth which indicates that consumers are still cautious about spending.
Robust balance sheet
S-REITS’ balance sheets remain healthy, with gearing ticking down QOQ to 36.9% in Q4. In addition to a small 10% and 13% of SREIT debts maturing in 2019F and 2020F, c.82% of total SREIT debts are on fixed rate basis. This should largely insulate S-REITS’ earnings from interest rate hikes. “We expect S-REITS to actively explore inorganic growth opportunities, both in Singapore and overseas, from both third parties as well as their respective sponsor’s pipeline,” CIMB said. The S-REIT sector has expanded by more than 200% over the past decade, data from SGX show. It ranks third largest in Asia and sixth globally with a market cap of US$53B, according to boutique real estate fund manager Q Investment Partners.
Share prices will continue to outperform the broader market in the more benign interest rate environment.
Retail REITS will trail behind the outperforming office and hospitality segments
S-REITS distribution per unit by sub-sector