• All nine REITs under our coverage performed in line in 1Q21.
• REITs traded down after Singapore tightened COVID-19 measures. This and a 20bp dip in 10YSGS lifted dividend yield spreads to 274bps, back to -1SD. Healthcare the only sub-sector in the green (+1.2%). Hospitality REITs fared the worst, down 6.9%.
• Remain OVERWEIGHT with selective preferences. Catalysts expected from pick-up in economy and resumption of DPU growth. REITS under our coverage expected to deliver FY21e DPU yields of 3.6-8.8%. Prefer Industrial and Retail. Top picks are Manulife US REIT (MUST SP, BUY, TP US$0.84) and Ascendas REIT (AREIT SP, BUY, TP S$3.64).

SECTOR SNAPSHOT

Market transactions picked up in April. Ascendas REIT announced its acquisition of a remaining 75% stake in Galaxis, a business park in one-north for S$543.8mn. IREIT (IREIT SP, Accumulate, S$0.68) added 15.8% to its AUM through a sale-and-leaseback deal with Decathlon for 27 retail properties in France. Mapletree Industrial Trust’s (MIT SP, Not Rated) acquisition of 29 US data centres for S$1.8bn is expected to boost its AUM by 26.5%. Elsewhere, ESR REIT (EREIT SP, Not Rated) will acquire a S$124.7mn logistics facility in Singapore and a 10% stake in a GIC majority-owned Australian logistics fund for S$68.5mn – its first overseas investment.

Developers may tap the Singapore market through REIT IPOs in the next 12 months. Unlisted Mapletree Investments is exploring a US$1bn student housing REIT IPO while City Developments (CIT SP, Buy, S$10.68) is in talks with Qatar Investment Authority to inject HSBC’s London headquarters building into a planned sterling-denominated UK commercial REIT by City Developments. The potential deal could boost the REIT’s portfolio to £1.8bn (S$3.4bn) from £600mn.

Rising community cases in Singapore forced the government to tighten COVID-19 restrictions on 14 May 2021. The latest measures include cutting group sizes from five to two persons, a prohibition of in-restaurant dining and reinstatement of the work-from-home default. These new measures will take effect from 16 May to 13 June. While they will weigh on F&B operators, several REITs, as well as Enterprise Singapore, have pledged support for F&B tenants and operators. Enterprise Singapore will alleviate delivery charges by funding five percentage points of the commissions charged by the three food delivery platforms: Deliveroo, foodpanda and GrabFood. These platforms typically charge 30% commissions on orders. Frasers Centrepoint Trust (FCT SP, Buy, S$2.88) intends to support tenants through free delivery services and customer rewards, rental and operational assistance and extension of grace periods for all vehicles entering all its malls to support delivery riders and drivers. Mapletree Commercial Trust (MCT SP, Not Rated) will provide rental and operating assistance to its retail tenants. CapitaLand Integrated Commercial Trust’s (CICT SP, Buy, S$2.54) Westgate will be close for two weeks commencing 14 May due to the several COVID-19 infections linked to the mall. The REIT will extend rental waivers as well as platform and commission waivers for online sales made through the eCapitaMalls and Captia3Eat platform during the mall closure period.

The cancellation of the World Economic Forum in Singapore in August 2021 is a minor setback for the hospitality industry. It may result in a loss of confidence and reduction of corporate travellers and bookings. On the other hand, the increase in infection cases may require the government to maintain or increase the number of hotels used for block booking for quarantine purposes.

Office

Leasing for Singapore and US office REITs has picked up, a reversal from the past three quarters when tenants delayed decision-making. Renewals formed the bulk of the leases signed. Bank tenants were the main downsizers. Excluding them, most tenants have retained their previous space requirements. Occupancy for the majority of the office REITs dipped due to non-renewals. This mirrored the industry’s occupancy, which slid 0.1ppt QoQ to 88.1%.

Reversions were mostly positive, in keeping with a 3.3% QoQ improvement in the rental index. However, rents were still 4.8% lower YoY. Reversions for Keppel REIT (KREIT SP, Not Rated) were strong at 10.4%, owing to its under-rented portfolio. OUE Commercial REIT’s (OUECT SP,
Not Rated) reversions were 3.8-7.8%. CapitaLand Integrated Commercial Trust’s (CICT SP, Buy, S$2.54) office reversions were negative, weighed down by a renewal with a large tenant. Reversions for Prime US REIT (PRIME SP, Accumulate, US$0.94), Keppel Pacific Oak (KORE SP, Not Rated) and Manulife US REIT (MUST SP, Buy, US$0.84) came in at 9.5%, 5.7% and 2.5% respectively.

Source: Phillip Capital Research - 25 May 2021