SINGAPORE (Apr 13): Phillip Capital has upgraded its rating on the Singapore REITs sector to “overweight”, preferring the office and industrial sub-sectors. But expects the retail sector to be the greatest casualty of Singapore’s containment measures and Covid-19 Bill.

Some of Singapore’s containment measures include the closure of bars, entertainment venues and enrichment centres from Mar 26, as well as the “circuit breaker” period from Apr 7 to May 4, which sees the closure of schools and workplaces, and suspension of business that cannot be conducted through telecommuting – except for essential services and key economic sectors.

The Covid-19 (Temporary Measures) Bill was proposed by the Ministry of Law on April 1 to provide temporary relief for the inability to perform contractual obligations. This includes leases for non-residential and will prevent the contracting party from taking legal actions against or terminating the lease of the non-performing party. If passed, the measures will be in place for six months from the commencement of the Act and may be extended for up to 12 months.

Meanwhile, the REIT Association of Singapore (REITAS) has written an open letter to regulators to outline the jeopardising position of the REITs from the impending Covid-19 Bill. The letter requests the government to offer mechanisms to shelter REITS from the impact of the rental deferment, such as underwritten financial support proportional to the deferred rental income.

Retail and F&B tenants have been actively engaging landlords for assistance and rebates. Excluding the F&B tenants within their portfolios, Commercial and Industrial landlords have not received many requests for assistance from tenants.

In a Thursday report, analyst Natalie Ong says, “Due to the 90% payout requirement to qualify for tax transparency, REITs will face cashflow mismatch during this six to 12-month rental deferment period.  While REITs can dip into their retained earning and capital gain reserves to shore up DPU. REITs are not averse to DPU cuts in the name of preserving capital and protecting their balance sheets - we expect the latter to be more of the case.”

Moreover, the Fed has cut rates by 150 basis points, while the 3M SOR dropped 95 basis points y-o-y to 0.95%. While reference interest rates have fallen, credit spreads have increased due to the increase business uncertainty.

“REITS should not face any difficulty refinancing maturing loans, however whether there will be interest savings on renewal depends on the new credit spreads offered – as long as spreads do not wipe out the decrease in reference rates,” adds Ong.

The analyst believes that caution and lower valuations will dampen REITs’ future acquisition momentum, which have typically been structured using a mix of debt and equity capital.

“We expect acquisitions to pause, likely resuming in late 2020. Accretive acquisitions are still possible especially for REITs with lower gearings and higher debt headroom which are trading at above-par P/NAV,” she adds.