SINGAPORE (Feb 7): The outbreak of the novel coronavirus is likely to affect REITs with exposure to Singapore’s hospitality sector. This is no surprise, given Chinese visitors comprised around 24% of total visi­tors for the 11 months to Nov 30, 2019.

The Immigration and Checkpoints Authori­ty (ICA) has announced that from Feb 1, 2020, 2359hrs, all new visitors, regardless of nation­ality, with recent travel history to mainland China within the last 14 days, will not be al­lowed entry into, or transit through, Singapore.

“Naturally, hospitality trusts tend to be most affected,” says Credit Suisse in a Feb 3 report. During a results briefing by Ascott Residence Trust (ART), Beh Siew Kim, CEO of ART’s manager acknowledged that the trust experienced cancellations, in particular for short-term stays in China.

ART’s portfolio, which is geographically diversified, comprises mainly serviced resi­dences as well as 11 rental housing properties and hotels from the acquisition of Ascendas Hospitality Trust in December 2019. These in­clude six hotels in Australia, five in Japan and two in Seoul. According to Beh, around 50% of ART’s customers are corporates.

Since the start of the year, hospitality trusts is the worst performing sector (see chart 1), and Far East Hospitality Trust was the worst performing hospitality trust (see chart 2). ART was the fifth worst performer.


To be sure, none of the hospitality trusts were listed during the outbreak of SARS in 2003. But as a reference, in May 2003, with the decline in visitor arrivals, industry hotel occupancy fell to a low of 34% (down 39 ppt y-o-y), Credit Suisse recalls.

According to research by the Swiss bank, average room rates in Singapore fell by 17% y-o-y to $105 and RevPAR fell by 57% y-o-y to just $36 in the same month. While occu­pancies bounced back to 71% by July 2003, RevPAR only started to recover from Septem­ber in the same year, as room rates remained under pressure till February 2004, Credit Su­isse recounts.

Given that the spread of the novel coro­navirus originated from Wuhan province and that the number of confirmed cases is likely to exceed 24,300 in China, REITs which will inevitably be negatively impacted are Sas­seur REIT, CapitaLand Retail China Trust (CRCT), and BHG Retail REIT which have all their malls in China. Retailers in China includ­ing Starbucks and Apple are shuttering their shops to stop the spread of novel coronavirus. Unsurprisingly, Sasseur REIT and CRCT are among the worst performers so far this year.

Data centre, healthcare among the best performers

On the other hand, the best performing sector was data centres. Keppel DC REIT (see chart 3), the only pure data centre REIT, rose 10% this year, three times higher than its yield of 3.3%. Although Keppel DC REIT’s DPU fell 1.1% y-o-y in 4QFY2019 to 1.83 cents and rose 4% y-o-y to 7.61 cents in FY2019, the REIT had a private placement in Sept last year that sty­mied DPU growth.

The second best sector was healthcare, which effectively was buoyed by Parkway­Life REIT’s 8.43% rise this year.

ParkwayLife REIT does not directly bene­fit from a rise in patient numbers because of its lease structure (see “Clock is ticking on ParkwayLife REIT’s 15 year master lease” on p16). However, things may get interesting. Its first 15-year lease with its sponsor is running down and ends in 2022, with a 12-month no­tice given to renew. In addition, IHH Health­care owns Mount Elizabeth Novena Hospi­tal which is a pipeline property for the REIT.

First REIT, on the other hand, may face un­certainties, but not because of the virus. Four of First REIT’s hospitals – which represent around 24% of First REIT’s assets – have 15- year leases which are up for renewal in 2021, as does a fifth small asset in Korea valued at $8.1 million. Leases for Indonesia properties “are pegged to SGD to mitigate forex volatil­ity,” First REIT’s annual report says. The ru­piah has weakened considerably since 2006, and that may impact the master lease rents for the four hospitals with expiring leases. It may also imply that gross rental income from these hospitals could be lower.

Industrial REITs were the third top perform­ing sector. Mapletree Industrial Trust was the best performing REIT in the sector this year.

Although no sector is likely to escape the impact of the novel coronavirus, among the REITs, industrial REITs and ParkwayLife REIT are probably the most insulated operational­ly in the short term. Two logistics REITs, Ma­pletree Logistics Trust and EC World REIT, have assets in Wuhan but these are negligi­ble (see table 2).

Within the sector, large cap REITs that have a diversified portfolio – by asset class and geogra­phy – are probably in a better position to weather the storm given lower concentration risk – and Ascendas REIT is the largest REIT.

On Feb 5, Ascendas REIT closed at a new all-time high of $3.27. Following the acqui­sition of 28 properties in the US last Decem­ber, Ascendas REIT’s overseas exposure rose to 28% of portfolio value as of Dec 31, 2019, from 21% a year ago.

Its US portfolio was further strengthened by lease renewals with positive rental rever­sions from a couple of its large tenants, Care­Fusion and Nike. Overall, Ascendas REIT’s portfolio recorded rental reversions which were 6% higher y-o-y for the nine months to Dec 31, 2019.

“Rental reversion numbers were strong. Ten­ants [prefer] to stay [put] partly because of re­location costs and the need to raise capital to relocate,” says William Tay, CEO of Ascendas REIT’s manager. He is guiding low single-dig­it rental reversions in Singapore for 2020, and high single-digit rental reversions for over­seas properties.

This year, Ascendas REIT’s distributions per unit could be lifted by a full-year contribu­tion from the US portfolio, Nucleos, FM Global and a suburban office acquired in Melbourne. By the fourth quarter of this year, Ascendas REIT's built-to-suit Grab headquarters in Sin­gapore will be completed.

Credit Suisse says that it “prefers Keppel DC REIT for acquisition and Keppel Pacific Oak US REIT (KORE) for strong organic growth”. KORE owns a portfolio of suburban office and campus-styled properties in the US.

KORE achieved positive reversions of 14.3% for FY2019, driven by Seattle and Austin. “In 2020, 64% of expiries will come from these cities, hence, reversions should remain elevat­ed at more than 10%,” Credit Suisse observes. KORE’s manager had articulated that it is still keen on acquisitions, Credit Suisse points out.

Office REITs registered a small gain year to date, supported by gains in Manulife US REIT, IREIT Global, Prime US REIT and CapitaLand Commercial Trust.