SINGAPORE (July 7): As the Singapore economy opens up in phases from the circuit breaker measures, DBS analysts Derek Tan, Rachel Tan, Dale Lai, and the Singapore Research Team believe there could be a broadening rally in 2H20 on returning investor confidence, and “lower-for-longer” rates.

However, with the reduction of various tenant rental waivers from landlords and government incentives moving forward, the analysts expect the economy to deteriorate first, before recovering gradually.

“That said, we have noted a broadening of the S-REIT rally as investors position ahead of a recovery. The next data-point we see boosting investors’ confidence is the phased return of office workers to CBD, which will boost office and selected retail S-REITs,” say the analysts in a July 7 report.

Investors should focus on the possible supply crunch in 2H20, instead of the structural demand changes, which will unravel within the next three to five years, they say.

The potential supply crunch may come about due to delays arising from a stop in work during the circuit breaker measures.

Over time, the analysts say they see resilience in being positioned in Grade A offices (such as KREIT and CCT), and decentralised office spaces (MCT).

In the retail sector, they prefer suburban malls, over tourist-focused properties, as discretionary spending will likely remain “subdued” amidst the weak economic outlook.

“We see value in the retail landlords CMT and FCT to play catch-up given prices are 16-20% below that at start of 2020,” they say.

Among the top performers year-to-date, the analysts say they continue to “like” the industrial S-REITs as they ride on the trends of the greater adoption of e-commerce and office decentralisation.

“We, however, employ a differentiated strategy, with a focus on A-REIT and FLT which we believe will play catch-up given their higher absolute yields of 5.0% and 6.5% respectively,” they note.

“We also see a yield compression in the mid-cap industrial S-REITs as economic recovery gathers pace in the medium term. We like ALLT and SBREIT for their quality portfolio and value-accretive pipeline of assets,” they add.

S-REITs are now trading at 1.15x P/NAV and FY20/21F yield of 5.5%/6.3%, which implies a growth rate of some 15%.

“Spreads are attractive to remain vested and while growth in 2021 is at a robust 80bps (or 15%) owing to one-offs in 2020, we see upside upon a resumption of acquisition activities in 2H20,” advise the analysts.

“We see possibilities in selected S-REITs in the industrial and retail subsectors positioned to leverage on their sponsors’ pipeline and support growth distributions”, they add.