SINGAPORE (May 20): As the Covid-19 pandemic lingers, latest results from Singapore REITs (S-REITs) have revealed that capital retention remains a top priority as they brace for weaker fundamentals. 

Lauded by investors for stability and returns, S-REITs are now set to face uncertain macroeconomic conditions that could pose near-term challenges. 

For 1Q2020 ended March, Maybank Kim Eng Research analyst Chua Su Tye says that S-REITs had a ‘decent start’ despite conserving copious amounts of cash in light of the macroeconomic uncertainty. 

In particular, Chua notes that stable occupancies and positive rental reversions were bright spots for the general sector, although shopper traffic and tenant sales slowed following enhanced safe distancing measures. 

In 2Q2020 ending June, Chua is expecting the full impact of the ‘circuit breaker’ measures to cause sharp falls in the revenue and net property income (NPI) figures of S-REITS. And as always, some segments are likely to be impacted more than others. 

“Retail is likely to be the worst hit, as hospitality receives minimum fixed rents from their master leases. Lease structures could see higher gross turnover (GTO) contributions following Covid-19,” says Chua. 

“Overseas assets should back DPUs for industrial, while Singapore rents are now likely to bottom out in 2021, and tenancy risk while low, could rise,” he adds. 

On the flipside, he shares that office REITs have low expiring leases in 2020 in the range of 5%-9%, which in turn positions them to deliver positive returns. In particular, US-focused office REITs boast even lower lease expiries of 4%-6%, and higher dividend yields of more than 9%. 

The way Phillip Capital analyst Natalie Ong sees it, the immediate impact on FY2020 earnings for S-REITs will be based on the rental rebates and higher vacancy rates. 

“Rental rebates offered will lower FY2020 revenues and DPUs for the REITs. Among the subsectors, retail REITs have given the most rental relief to their tenants (2 to 3 months) as only 20% to 25% of their tenants were operating during the circuit breaker,” says Ong.

“While the commercial and industrial sectors’ tenants have a moderate to low dependency on their premise, REITs are prepared to/have offered targeted relief to tenants who are more in need of help, such as the retail and small medium enterprises (SMEs) with their portfolios.” adds Ong. 

“As such we expect the rental relief given to commercial and industrial tenants to have minimal impact to distributable income.”

According to analysts, the retail sector is likely to bear the brunt of the virus. 

“The Covid-19 situation has highlighted the vulnerable positions retail tenants are in, with their thin margins, as well as the market’s expectation for landlords to have “more skin in the game,” shares Ong. 

Maybank’s Chua says that although cap rates remained unchanged in 1Q2020, visibility for retail REITs remains low as the easing of travel restrictions remains uncertain. 

“Valuers could reassess assumptions after a prolonged Covid-19 vacancy and rental impact, and as asset availability rises with sellers facing redemption pressure or liquidity needs,” says Chua. 

Conversely, Chua says better visibility is evident for industrial and office REITs. 

For industrial REITs, Chua expects most leasing activity to be centred on renewals, given the weak business confidence, which should help support tenant retention efforts and occupancies, especially for business parks. Chua is also expecting rents to recover from 1H2021, at the earliest. 

Chua notes that office REITs had booked healthy occupancies and positive double-digit rental reversions in 1Q2020, with buoyant leasing activity and low expiries expected for the year. 

“We do not expect the office landlords to provide substantial rental relief or rent deferments to their tenants except for co-working operators, which contribute 2-4% of net leasable area (NLA),” says Chua. 

“Rental reversions are expected to stay positive into 2020 given the low expiring rents in FY2020-22,” he adds. 

Phillip’s Ong, however, remains divided on the office sector. She says it is still early days to predict how future demand for office space will look like as counteracting leasing strategies are rolled out. 

On one hand, the successful implementation of telecommuting is likely to have a long-term impact on occupier strategy and poses risks to office demand,” says Ong. 

“On the other hand, we may see companies choosing to reduce over-concentration risk by adopting lower desk-density and splitting of offices, hence increasing the demand for space,” she adds. 

However, both brokerages say S-REITs still present attractive upside from their current prices, and are choosing to remain optimistic. Phillip is reiterating its “overweight” stance on S-REITs, while Maybank is keeping its “positive” call on the sector.