A JP Morgan update on the outlook for S-REITs just ahead of their 3QFY2023 business updates and financial results makes for a sobering read.
Higher borrowing costs and weak forex are likely lead to y-o-y declines in 3Q2023 DPU for S-REITs reporting results, says JP Morgan in the update. Keppel DC REIT which reports business updates on Oct 16 kicks off the reporting season.
Rents signed by tenants during Covid are likely to be renewed this year and next. In 1H2023 and 2Q2023, rental reversions – in particular for industrial S-REITs – were positive. “The hotel sector should also benefit from record high July 2023 RevPAR,” JP Morgan says.
Risk-free rates have been rising on an overall basis, accounting for the 10% decline rear-to-date in prices based on the iEdge S-REIT Leaders Index. “We recommend investors continue to stay on the sidelines and for those that need to stay invested in the sector to hide in CapitaLand Ascendas REIT A17U , CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust J69U . We remain underweight on Mapletree Logistics Trust, Keppel REIT and Suntec REIT,” JP Morgan adds.
On the whole the research note says that positive rental reversions are likely to continue for retail and industrial REITs, given that tenant sales are above pre-Covid levels, with occupancy costs ranging in the teens (16% to 18%), and the potential moderation in electricity costs.
Singapore office rents moderated in 3Q2023, falling by 0.3% q-o-q, to $11.29 psf pm. JP Morgan says office REITs should still be able to report reversions as spot rents are up 12% since 3Q2020 (office leases are generally three-year leases).
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For office, investors should be alert to possible shadow space given WeWork’s travails. CICT has rented an entire building to the operator. For industrial REITs, the key focus could be the degree of negative rental reversions in China. Both MLT and CapitaLand China Trust (CCT) have warehouses in China, and CLCT also owns business parks where conditions have been challenging.
The exception to the positivity around the hospitality/ lodging sector could be CapitaLand Ascott Trust (CLAS). Although it reported sterling 1H2023 financials with revenue up 30% y-o-y, gross profit up 31%, distributable income up 26% and distribution per stapled security up 19%, the dilution caused by its capital raising is likely to be immediate. Since its acquisitions and capital raising were announced, CLAS stapled security price is down more than 20%, and trading 10% below the offer price of $1.02 for the preferential equity fund raising. Since its acquisitions are from its sponsor, an EGM is required, and this will be will be held on Oct 24.
Elsewhere, investors may be focused on vacancies in Mapletree Industrial Trust ME8U ’s data centres in the US, and CLAR’s business parks. “Given 19% increase in business/science park supply over the next four years, updates on pre-commitment for CLAR and MINT’s developments will be sought with investors also focused on backfilling of Google’s space at ATP for Frasers Logistics and Commercial Trust (FLCT).
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In addition, FLCT and FCT will be undertaking their annual valuation exercise. This is likely to be positive for FCT. However, FLCT may provide details on its Australian and European portfolio which could be impacted by forex and in the case of Europe cap rate expansion.
JP Morgan warns it may cut valuations if 3Q2023 results show that S-REITs are weighed down by higher cost of debt, weak foreign currencies, and stubbornly high risk-free rates.
