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S-REITs picking up steam again by diversifying income streams: OCBC

Jovi Ho
Jovi Ho • 4 min read
S-REITs picking up steam again by diversifying income streams: OCBC
“We continue to recommend investors to adopt a balanced approach towards investing in the sector."
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Despite few acquisitions by S-REITs this year owing to the Covid-19 pandemic, some players here are diversifying their income streams, a sign of gradual pickup in activity, say OCBC analysts in an Oct 15 note. OCBC Investment Research is maintaining its ‘overweight’ stance on the S-REITs sector.

“We continue to recommend investors to adopt a balanced approach towards investing in the sector. This entails sticking with selective winners exposed to the data centre, logistics and business parks sub-sectors and REITs which have positioned themselves defensively in anticipation of a weaker outlook, but complement these with REITs in beaten down sub-sectors with deep value and supported by strong sponsors,” note OCBC.

Given the ongoing widespread impact of the Covid-19 pandemic, OCBC states it is not surprising that the pace of acquisitions by S-REITs has been slow this year, given the difficulties in carrying out physical due diligence.

“However, we note that there has some pick-up in activities, with Mapletree North Asia Commercial Trust (MNACT) and CapitaLand Retail China Trust (CRCT) recently announcing an expansion of their investment mandates.”

MNACT announced its maiden penetration into the South Korean commercial market with a proposed acquisition of a 50.0% stake in a freehold 20-storey Grade A office building located in the Gangnam Business District. This is expected to be DPU accretive and OCBC believes there is room for further upside if MNACT is able to ramp up the occupancy at the property.

CRCT’s expanded investment strategy now includes office and industrial (including business parks, logistics facilities, data centres and integrated developments) real estate in China, Hong Kong and Macau besides just retail.

“We expect CRCT to tap on its sponsor CapitaLand’s pipeline, which includes 25 retail, 27 commercial and 10 business park, logistics and industrial assets in China,” notes OCBC.

Suntec REIT became the latest S-REIT to tap into a new market. On 8 Oct, it announced a proposed acquisition of a 50% interest in two Grade A office buildings with ancillary retail (collectively known as Nova Properties) located in the heart of Victoria, West End, London, UK for an agreed value of GBP430.6 million (about $766.5 million). This marks Suntec REIT’s maiden entry into the London and UK commercial market. Equity Research 15 Oct.

See: S-REITs in 'flurry' of M&A activities, BOE may deploy negative interest rates: UOB Kay Hian

Government support

Singapore’s Deputy Prime Minister Heng Swee Keat highlighted in early October that the Monetary Authority of Singapore (MAS) estimates the fiscal stimulus rolled out will prevent Singapore’s economy from contracting by a further 5.6% in 2020 and 4.8% in 2021, while the rise in resident unemployment rate will be offset by some 1.7 percentage points this year.

The Temporary Bridging Loan Programme (TBLP) will be extended for six months till Sep 2021, albeit at reduced levels, while the MAS Singapore Dollar Facility for Enterprise Singapore Loans will also be extended till Sep 2021, highlights OCBC.

SMEs in more affected sectors such as tourism, hospitality, conventions and exhibitions and qualifying retail outlets will be given the option to defer 80% of principal payments on their secured loans granted by banks or finance companies, as well as loans granted under Enterprise Singapore’s Enhanced Working Capital Loan Scheme and TBLP till Jun 30, 2021.

“We believe this is a positive for industrial and retail REITs, which are likely to see a bigger proportion of SME tenants in their portfolios,” note OCBC.

“Following our upgrade of Keppel DC REIT (KDCREIT SP) with a fair value (FV) of $3.32] to a ‘buy’, we add the stock to our preferred picks list,” note OCBC.

Its other top ‘buy’ picks are: Ascendas REIT (AREIT SP) [BUY; FV: $3.92], Frasers Logistics & Commercial Trust (FLT SP) [BUY; FV: $1.59], Manulife US REIT (MUST SP) [BUY; FV: US$0.84], Mapletree North Asia Commercial Trust (MAGIC SP) [BUY; FV: $1.09], CapitaLand Mall Trust (CT SP) [BUY; FV: $2.39], and ESR-REIT (EREIT SP) [BUY; FV: $0.45].

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