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PhillipCapital maintains 'overweight' on S-REITs on continuing acquisition momentum

Felicia Tan
Felicia Tan • 4 min read
PhillipCapital maintains 'overweight' on S-REITs on continuing acquisition momentum
In September, the FTSE S-REIT Index gained 1.8% m-o-m, with the strongest gains observed from the hospitality subsector.
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PhillipCapital analyst Natalie Ong has kept her “overweight” recommendation on Singapore REITs (S-REITs) due to the spate of acquisitions spurred by low interest rates and recovery in share prices.

On September 3, Frasers Centrepoint Trust (FCT) announced its plans to acquire the remaining 63.1% in PGIM Asia Retail Fund (ARF) for $1.06 billion.

See: Frasers Centrepoint Trust announces transformational transaction, catapulting it to the big league

Ten days later, Keppel REIT bought Sydney commercial property, Pinnacle Office Park, for A$306 million ($303.3 million).

See also: Keppel REIT buying Pinnacle Office Park in Sydney for $303.3 million

REITs in general also seem to be on the mend post Covid-19.

See also: RHB lifts SGX’s TP to $10.40 after strong operating data in May

Office REITs, Ong says, will remain “relevant” due to the need for the cultivation of mentorship, collaboration, corporate culture, and creativity, which are best effected through physical interaction.

While Ong expects some attrition in office demand due to companies downsizing or experimenting with working remote, she says the maintenance of an office address will remain the dominant trend.

Tenant sales have recovered to normalised levels in suburban malls, which means good news for retail REITs.

See also: MLT’s divestment of Mapletree Xi’an Logistics Park signifies ongoing proactive portfolio reconstitution strategy: Citi

The recovery in sales comes despite shopper traffic remaining some 40% below pre-Covid-19 levels due to capacity control measures.

The figures also imply that shoppers are becoming more efficient with their trips to the malls, which translates to higher conversion rates, says Ong.

Shopper traffic at central malls have also recovered to an estimated 40% pre-Covid-19 levels owing to the single-digit local infection cases throughout Phase 2, and a gradual return to office during the period.

“We think that the recovery in tenant sales would return confidence to tenants, and right concern of the sustainability of traditional retail. Capacity constraint in malls and particularly in dine-in establishments are partially alleviated by more balanced customer-flow throughout the day,” notes Ong.

Tenants will also benefit from the increase in exposure to e-commerce and membership initiatives by landlords, which allows them to compete with other online retailers.

“We think retail operators like CMT and FCT will have greater success with their e-commerce/omni-channel strategy given the higher number of malls in their portfolios and the one million and 800,000 members on their membership programmes,” adds Ong.

The hospitality subsector is likely to see better days on the back of the Green Lane travel arrangements established between Singapore and six other countries – Brunei, China, Malaysia, New Zealand, Korea, and Japan.

For more stories about where money flows, click here for Capital Section

However, don’t expect a 100% recovery just yet. Ong expects a slow recovery for the subsector in 2020, depending on the timeline of the Covid-19 vaccine.

“We expect business travels to remain muted, spurred by reason for travel. Transaction-driven or top-management meetings will likely be among the first to resume. Staycation demand to help fill occupancies in the near-term,” she says.

Continuing to view REITs as a stable yield investment, Ong believes that S-REITs may emerge stronger with more future-ready portfolios.

“We continue to prefer the Commercial and Industrial sub-sectors due to tapering office supply, and AEI and redevelopment opportunities. These two sectors remain more resilient, relevant and stable despite the pandemic,” she says.

While the outlook for the retail sector looks more optimistic, Ong says she is holding off on upgrading the sector as she waits for sustained leasing demand to compensate for the shorter weighted average lease expiries (WALEs) of the sector.

Ong remains “cautious” on the hospitality sector due to continued restrictions on international travel.

For the month of September, the FTSE S-REIT Index gained 1.8% m-o-m, with the strongest gains observed from the hospitality subsector at 6.9%.

Conversely, the industrial subsector registered the weakest performance with a -7.1% contraction, likely due to profit taking, says Ong.

Of the REITs under the brokerage’s coverage, PhillipCapital has given “buy” recommendations on Ascott Residence Trust (ART), CapitaLand Mall Trust (CMT), Manulife US REIT, and Prime US REIT. It has given “accumulate” recommendations on Frasers Centrepoint Trust (FCT), Dasin Retail Trust, CapitaLand Commercial Trust (CCT), and “neutral” on IREIT Global Trust and Keppel DC REIT.

As at 4.12pm, units in ART, CMT, Manulife US REIT, and Prime US REIT are trading at 92.5 cents, $2, 77.5 US cents, and 82 US cents, respectively.

Units in FCT, Dasin Retail Trust, and CCT are trading at $2.66, 81.5 cents, and $1.71, respectively.

Units in IREIT Global Trust and Keppel DC REIT are trading 70.5 cents and $2.97, respectively.

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