Investors looking to invest in Singapore REITs (S-REITs) should remain focused on the re-opening theme, such as retail, office and hospitality S-REITs in FY2022. This is as it continues to see favour in the new year, say DBS Group Research analysts Geraldine Wong, Derek Tan, Rachel Tan and Dale Lai.
To date, the impact of the Omicron variant has proven to be milder than the Delta variant, observe the analysts in a Jan 5 report.
“We anticipate a strong retail sales performance in 4Q to propel domestic festivity spending for the retail REITs as overseas travel was once again jeopardised by the onset of Omicron. The hospitality sector continued to see strong domestic demand across the December holidays even as Vaccinated Travel Lane (VTL) ticket sales were announced to be halted until the 20th of January 2022,” write the analysts.
“Office sector sees brighter skies going into 2022, as more corporates will be setting clearer instructions on staff return to office in 2022,” they add.
In the 1QFY2022, the analysts predict that re-opening trades such as the retail, office and hospitality sectors may outperform industrial subsectors due to relatively cheaper valuations and stronger growth.
The upcoming results season, which begins in late January will see a “brighter outlook” with the Singapore economy looking to be on the mend.
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“We see stronger domestic retail sales driving a 5-6% rise in distributions per unit (DPUs) for retail and selected commercial S-REITs while construction delays are pushing back office supply completions to 2023/24, implying that rentals are likely to remain firm,” they write.
To this end, the analysts have indicated their preference for REITs such as Frasers Centrepoint Trust (FCT), Lendlease Global Commercial REIT (LREIT), CapitaLand Integrated Commercial Trust (CICT) and Suntec REIT.
In addition, the analysts like plays such as Ascott Residence Trust (ART) for “its globally diversified portfolio which will lead peers in a recovery. We prefer Mapletree Industrial Trust (MINT) and Frasers Logistics and Commercial Trust (FLCT) within the industrial space for their relative stronger dividend growth profiles,” they add.
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In terms of subsectors, the healthcare subsector saw the highest growth amongst S-REITs with a 34.6% growth as at December 2021. This was followed by a 15.9% growth in the retail subsector. The industrial S-REIT subsector stood third with an improvement of 9.9%.
Upside for hospitality REITs, say CGS-CIMB analysts
Meanwhile, CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee have kept their “overweight” recommendation on the S-REITs sector, going into 2022.
Specifically, 2022 looks to be a better year for hospitality S-REITs on the back of greater travel demand, few restrictions and a strong desire to travel, they write in a Jan 5 report.
At present, valuations for hospitality REITs are trading below net asset value (NAV) at 0.75 times to 0.86 times.
“We see further re-rating on stronger RevPAR, which we forecast to grow 20% y-o-y in 2022 and 35% in 2023 for the REITs’ hotels in Singapore,” they add, with ART being their top sector pick.
“The earlier and faster recovery of domestic travel vs. international travel as well as in Europe and the US (33% of ART’s assets under management or AUM) bode well for ART,” they continue.
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Despite the emergence of the Omicron variant, Eing and Lock are buoyant on the prospects of the hospitality industry, believing that it will see a rebound. The analysts also expect the hospitality industry to “gather pace” as soon as the Omicron numbers wane.
“In our view, the world is now better equipped to tackle any new development in the pandemic. Unlike last year when the world went into total lockdown, the countries are less keen to impose strict measures this time round, thanks to the availability of vaccines, increasing vaccination rates. Furthermore, observations so far show that Omicron causes less severe illness as compared to other variants despite its more contagious nature,” write the analysts at CGS-CIMB.
As the world is unlikely to enter a strict lockdown like the one seen in 2021, Eing and Lock anticipate greater travelling activities and stronger revenue per average rooms (RevPAR) in FY2022.
The growth in FY2022’s RevPAR are expected to range from 30% to 100%, depending on the location of the hotels, they say.
“We see greater demand from both international and domestic travel as we project few er domestic tightening and international border restriction measures this year as compared to last year. Data points show that travel activities (flight bookings, airline capacity, lodging and flights) and travel sentiment picked up months before the emergence of Omicron, especially in Europe, North America and Latin America,” they write.
“These indicate a strong desire to travel, and we think that travel is highly likely to resume once the spike in Covid-19 cases settles down. Asia Pacific tourism recovery lags behind the rest of the world given the tighter Covid-19 restrictions,” they add.
In Singapore, the hotel occupancy rate may be raised by five percentage points, which assumes a small 5% of arrivals from VTL countries to Singapore, where 50% of them stay in hotels with an average length of four days.
“While this is not substantial, we think it is a good start. Based on Singapore’s VTL opening pace, we are not surprised if Singapore could fully reopen its borders by 2022, lifting industry RevPAR,” they write.
“We expect the recovery to accelerate from end-2023 and achieve near full recovery by end-2024. We believe that government contracts for the hotels are likely to be extended beyond 1QFY2022, limiting downside risk and providing support to RevPAR,” they add.
“While there were concerns that VTL arrangements would reduce staycation demand, our findings show that inbound travel exceeded outbound in September and October 2021 although departures spiked and exceeded arrivals in November 2021 due to pent-up demand and year-end holidays. We believe that inbound tourism will increase and exceed outbound as Singapore establishes VTLs with more countries that are major sources of tourists.”
Eing and Lock have given ART an “add” recommendation with a target price of $1.22. They have also given “add” recommendations for CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT) with target prices of $1.32 and 74.5 cents respectively.
Photo: Bloomberg
