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.

Singapore Business Review - - CONTENTS -

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.”

Pos­i­tive trends

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

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