CFA Society Singapore
SINGAPORE (Dec 19): DBS Research is expecting Singapore REITs (S-REITs) to deliver DPU growth in 2019.
DBS, which has an “overweight” rating on the S-REITs sector, expects investors to gravitate towards the retail and industrial sectors in 2019, due to the heightened risk surrounding demand for office space and hotel rooms arising from the ongoing trade war and risk of near-recession conditions in the US in 4Q20.
In a market focus report, lead analyst Mervin Song says, “Both the retail and industrial sectors have less downside risk to earnings given their exposure to nondiscretionary suburban retail spend and longer WALEs in comparison to office and hotel REITs.”
In addition, industrial REITs provide a better buffer to the impact of rising interest rates, due to their higher absolute yields.
DBS’ top “buy” S-REIT picks are CapitaLand Mall Trust (CMT), Mapletree Commercial Trust (MCT), Mapletree Logistics Trust (MLT), Mapletree North Asia Commercial (MAGIC), and Frasers Logistics and Industrial Trust (FLT).
Going into 2019, the analyst believes that supply risk will lend support to REITs across most real estate sectors.
“We expect supply pressures to ease in the industrial sector as we have gone past the peak in supply in 2018,” says Song.
And as for the retail sector, supply is expected to peak next year with the opening of Jewel Changi, but about 90% of the space has already been pre-committed. Hence, investors need not worry about supply going forward.
The office and hotel sectors will continue to see modest new additions, which lend support to landlords raising rents.
Based on DBS’ economist forecast, the Singapore economy is expected to grow by 3.0% in 2019, down from 3.4% in 2018. Subsequently, office rents are expected to rise 5-10% and hotel RevPAR by 3-4%. Industrial rents should increase by 3% with retail rents bottoming after falling over the last few years.
“On the back of an improvement in spot rents and impact from over $8 billion worth of acquisitions made in 2018, we expect the SREITs to deliver steady about 2% DPU growth in 2019 and increasing by a further about 2.6% thereafter,” says Song.
In the near term, the analyst forecasts the retail/commercial sectors to deliver the fastest growth owing to the impact of organic growth from CMT’s recent acquisitions and reopening of its Funan mall and MCT benefitting from its recent asset enhancement initiatives (AEI).
Most office REITs should start to see a recovery in DPU growth in 2019, as positive rental reversions achieved through the sector over 2H18 should start to filter through.
Meanwhile, the industrial sector should continue to maintain its track record of steady DPU growth largely due to acquisitions made in the previous year.
Finally, following a disappointing 2018, the hospitality REITs should benefit from an overall uplift in the Singapore hospitality market but at a more modest rate.
Furthermore, the analyst foresees more overseas acquisitions from REITs with tight asset yields in Singapore.
“In our view, the move overseas is most pressing for some industrial REITs given their exposure to properties with another 30-40 years remaining on their land tenure,” says Song.
The increase in benchmark interest rates over the past two years should start showing a greater impact on borrowing costs, but the analyst reckons that this should be mitigated by the REITs’ ability to grow income on the back of higher spot rents.