SINGAPORE (Apr 2): While the government’s proposed Covid-19 (Temporary Measures) Bill is likely to alleviate the financial pressure on local tenants, analysts are wary of the adverse impact this could have on the performance of Singapore REITs (S-REITs). 

The iEdge S-REIT 20 Index fell sharply on Thursday, following the announcement of the proposed bill on Wednesday. The index fell some 29.92 points, or 2.6%, to 1,123 in the morning trading session. 

Notably, Frasers Centrepoint Trust had fallen 11% to $1.87 as at 12.30pm, while Mapletree Industrial Trust sank 10.2% to $2.20.

According to DBS Group Research, the proposed Bill could create significant cash flow uncertainty for the REITs. The brokerage, for one, is concerned that landlords will potentially be saddled with bad debts if tenants were to go bust within six to twelve months. 

“At first read, the law appears to tilt the balance towards tenants (companies and individuals) whose cash flows are impacted due to the COVID-19 outbreak,” says DBS lead analyst Derek Tan. 

“For example, if an F&B restaurant is unable to fulfill its rent obligations due to a drastic drop in revenues caused by the COVID-19 outbreak,  the landlord will not be able to evict the tenant. Rents will continue to accumulate and be payable six months later,” he explains.  

CGS-CIMB Research analyst Lock Mun Yee argues that the implementation of the relief measures could weaken the cashflow for local landlords. 

“The absence of income, together with earlier announced rental relief packages and ongoing operating expenses, could likely constrain landlord[s] cashflow during [this] period,” she says.  

DBS’s Tan notes that landlords have already mobilised funds on their own accord to create “stimulus packages” for their tenants. 

This has typically come in the form of the extension of rental rebates for about two months, as well as drawing on security deposits to cushion near-term rent obligations. 

As a result of potential cashflow pressures, Tan opines that REITS may consider conserving cash flow by reducing DPU over the next two quarters. In light of this, DBS has cut its DPU estimates for S-REITs by 18-27% in FY2020. 

Segmentally, Tan expects that retail REITs will bear the brunt of the impact due to the introduction of unprecedented social distancing measures, with F&B outlets and cinemas among the worst  affected by the new restrictions. 

Emerging the single largest trade sector by gross rental income (GRI) among retail REITs with a 30.9% share, F&B REITs stand to be among the most affected by the new restrictions. 

Similarly, any disruption to the beauty industry could potentially be damaging to all retail REITs as the sector constitutes some 5.8-12% of GRI. 

In contrast, any adverse effect in the educational sector, for instance through the shuttering of tuition centres, is likely to be negligible due to its low GRI share of less than 2%. 

DBS predicts that Capitaland Mall Trust and Frasers Centrepoint Trust will be among the worst hit by the pandemic due to their large exposure to the Singapore retail market. 

The brokerage has downgraded these REITS, along with Starhill Global REIT to “hold”. In light of a sombre 2QFY2020 distribution per unit (DPU) payout and further headwinds, DBS has also downgraded SPH REIT to “fully valued”. 

This comes after SPH REIT on Wednesday announced it is slashing its 2QFY2020 DPU to 0.3 cents, some 78.7% lower than 1.41 cents a year ago. This was a result of the REIT bracing for “challenging circumstances” in light of the escalating Covid-19 situation. 

See: SPH REIT's 2Q DPU plunges 79% to 0.3 cent as Covid-19 uncertainties loom

Meanwhile, the brokerage is recommending that investors cash in on Mapletree Commercial Trust given the REIT’s diversified portfolio. 

On the other hand, CGS-CIMB’s Lock is choosing to remain optimistic on REITs, and is reiterating its “overweight” call on the sector. 

While Lock says a faster-than-expected Covid-19 recovery is the market’s most likely upside factor, she is quick to warn investors to brace for a possibly deeper than expected economic slowdown as the virus continues to rattle global financial markets.

CGS-CIMB is banking on Keppel DC REIT (KDCREIT) as its top sector pick, given its income visibility that is also bolstered by a long lease expiry profile. 

“KDCREIT has visible earnings growth in FY2020F and FY2021F driven by ongoing asset enhancement works,” says Lock. “It is also a beneficiary of higher data consumption as people work from home.”

Lock adds that KDCREIT has a long weighted average lease expiry (WALE) of 8.6 years and only 4.2% of its leases are up for renewal in FY2020. “We continue to be buyers of weakness,” adds Lock.