Singapore is still in Phase 2 of reopening the economy and businesses are slowly getting used to the new normal and are adapting well. This is apparent especially with the local REITs, as analysts are gaining more confidence in the sector and are venturing out of their safe zone to invest more in other Singapore REITs (S-REITs).

S-REITs gained marginally by 0.3% from August 16 to 30, and many recovery plays were seen, according to UOB Kay Hian. The top performers for that period came mostly from the retail REITs, Hospitality REITs and a Healthcare REIT.

Retail REITs, such as Frasers Centrepoint Trust (FCT), Lendlease Global Commercial REIT (LREIT), Mapletree North Asia Commercial Trust (MNACT) and CapitaLand Mall Trust (CMT) saw 7.2%, 4.8%, 4.4% and 3.7% gains respectively in the past two weeks.

Hospitality REITs, such as Far East Hospitality Trust (FEHT) and ARA US Hospitality Trust (ARAUST) increased 5.8% and 4.4% respectively, while healthcare REIT Parkway Life REIT (PREIT) was up by 6.2%.

 And while these REITs are gaining momentum, the industrial REITs, which were known to be the “safe” ones, are losing steam and are some of the top underperformers for the period. Industrial REITs Frasers Logistics & Commercial Trust (FLCT), Mapletree Industrial Trust (MINT) and Ascendas REIT (AREIT) lost 2.9%, 2.9% and 2.6% respectively as investors switch towards recovery plays in the retail and hospitality sectors.

In a September 2 report, lead analyst Jonathan Koh is positive on the Hospitality REITs’ recovery as Singapore has started the process of gradually re-opening its borders. The border restrictions to travellers from Brunei and New Zealand have been lifted where their Covid-19 situations are assessed to be well under control and risk of importation is low.

With effect from 1 Sep 20, travellers who stayed in Brunei and New Zealand in the last 14 consecutive days will not be required to serve the Stay Home Notice (SHN). However, they have to apply for an Air Travel Pass (ATP) and undergo Covid-19 test upon arrival at Changi Airport. The government SHN duration has also been shortened from 14 days to 7 days for travellers from other low-risk countries and regions, such as Australia (excluding Victoria state), Macao, China, Taiwan, Vietnam and Malaysia.

“Singapore has to gradually re-open its borders so as to maintain Changi Airport’s hub status. The challenge is to restore passenger volume, while keeping virus transmission under control,” says Koh, who has “buy” calls on FEHT and FHT with target prices of 58 cents and 54 cents, respectively as “both stocks trade at an attractive discount of almost 40% to NAV”.

Meanwhile, DBS Group Research shares the same sentiment as lead analyst Derek Tan says, “Valuation discount for ‘Covid-19 impacted’ sectors are too wide to ignore. We maintain our stance that we expect the S-REIT rally to broaden out in 2H20.”

“While investors have been rewarded for sticking with the large cap industrial S-REITs in YTD20, the valuation disparity between these and Covid-19 impacted sectors (retail, office and hospitality) has widened to more +1 standard deviation (SD) since the pandemic struck. We believe this warrants a relook and switch,” Tan adds.

Supported by positive datapoints in its recent channel checks coupled with expected gradual upturn in economic metrics, the analyst expects these sectors to play catch up, with the office and retail sector outperforming.

In the office space, Tan likes Keppel REIT (KREIT) and Mapletree Commercial Trust (MCT), as well as FCT, CMT and LREIT in the retail scene. However, he believes that there is still value from taking a rotational strategy in the industrial space, with AREIT and FLCT as the industrial sector picks.

As for the hospitality sector, more time will be needed to recover, but given minimal to no expectations, Tan likes ART and FEHT for their good value.

“We see risk abating as financial metrics remain stable (gearing has inched higher but remains <38%, ICR healthy at >4.0x) despite one of the worst quarters in SREITs’ history. Supported by government incentives and managers’ proactive cash preservation strategy and access to capital markets has enabled S-REITs’ balance sheets to pass the litmus test,” says Tan.