REITs outlook remains favourable, says Maybank Kim Eng

SINGAPORE (Nov 25): The outlook for Singapore Real Estate Investment Trusts (REITs) remains favourable and is seeing signs of distribution per unit (DPU) recovery in the retail and industrial sectors in the latest 3Q2019 results.

In a report filed on Nov 20, Maybank Kim Eng analyst Chua Su Tye says retail REITs delivered stronger DPU growth during the July-Sept quarter – CapitaLand Mall Trust led the pack with contributions by its malls Westgate in Jurong East and Funan on North Bridge Road.

“Shopper traffic improved 1-9% y-o-y across portfolios, but tenant sales were mostly lower on weak retail sales, except for prime Orchard Road malls, which were up from a lower base,” he notes.

“We believe REIT-owned malls will continue to outperform the broader market in both occupancies and rents. We reiterate our preference for large destination malls and suburban retail assets, which have been more resilient to online competition and weaker tourist spending,” Chua adds.

Industrial REITs also showed the strongest performance in 3Q2019, due to higher contribution from earlier acquisitions. As Chua notes: “We
continue to see stabilising rents (like) JTC’s all-industrial rental index (which) was flat in 3Q19; and (the) easing supply at +1.7% per annum for 2019 to 2021 +3.3% in 2014 to 2018.”

“Leasing activity was largely due to renewals and relocations as tenants continued to right size or consolidate, while holding back their expansion given uncertain macros, suggesting a slower recovery in rents. Demand remains tilted towards newer business parks and high-spec properties,” says Chua.

“Pre-commitment levels for new supply at 67-100% are higher than the 55% for the overall industrial sector average, as of end-Sep 2019. Our expectations of a DPU recovery are also supported by contributions from the REITs’ growing pool of overseas assets,” he adds.

Meanwhile, hospitality REITs are lagging in their earnings, with all but Ascott Residence Trust showing decline in their DPU. However, Singapore’s revenue per available room is showing signs of recovery, as CDL Hospitality REIT and Frasers Hospitality Trust have reported a 4.9% y-o-y increase in Singapore Revenue per available room (RevPAR) on the back of stronger leisure demand.

“We see a firm DPU recovery and have pencilled in RevPAR growth of 3-5% y-o-y per annum following Singapore’s longest-ever RevPAR downcycle. We see this as conservative, given a stronger corporate event calendar in even years and an easing supply of hotel rooms to +1.3% pa over 2018-22E from +5.5% in 2014-17, which should strengthen the RevPAR and DPU recovery in 2020,” notes Chua.

“We see a firm DPU recovery and have pencilled in RevPAR growth of 3-5% y-o-y per annum following Singapore’s longest-ever RevPAR downcycle. We see this as conservative, given a stronger corporate event calendar in even years and an easing supply of hotel rooms to +1.3% pa over 2018-22E from +5.5% in 2014-17, which should strengthen the RevPAR and DPU recovery in 2020,” he says.

REITs have been on an acquisition spree with a total of $6.5 billion in acquisition announced since July. Most REITs have also chosen to fund their transactions with equity despite ample debt headroom. DPU accretion for deal were announced at 0.6% to 12.4% while leverage levels have increased marginally to 35% on average on the back of larger assets under management.

“Industrial REITs were the most active in deals, as they pushed ahead with overseas diversification. Post-deals, overseas AUMs for industrial REITs are now at 24-69% of the total, up from 9-67%,” says Chua.

“Overseas assets are mostly freehold and should continue to strengthen S-REITs’ overall AUM growth, with their relatively longer weighted average lease expiry and leases embedded by annual rental escalations supporting DPU visibility,” he notes.

The brokerage is therefore maintaining its bias in industrial REITs, followed by hospitality and retail. The top picks are Ascendas REIT with a target price of $2.92, Mapletree Industrial Trust with a target price of $2.51, CDL Hospitality Trust with a target price of $1.59, Far East Hospitality Trust with a target price of 72 cents and Manulife US REIT with a target price of US 95 cents.