- FTSE S-REIT Index gained +1.8% MoM in September. Strongest gains observed from the hospitality subsector (+6.9%) while weakest performance in the industrial subsector (-7.1%), likely due to profit taking.
- FTSE REIT Index has been trading sideways for the past 4 months. Sector yield spread of 354bps over the benchmark 10-year SGS (10YSGS) yield was at the +0.11 standard deviation (SD) level.
- Maintain OVERWEIGHT on SREITs sector with sub-sector preferences in Office and Industrial portfolios.
Acquisition momentum for REITs continued, spurred by low interest rates and the recovery in share prices. On September 3, Frasers Centrepoint Trust (FCT) announced the $1,057mn acquisition for the remaining 63.1% stake in AsiaRetail Fund Limited, gaining full control of 5 suburban malls and 1 office asset located in Singapore. On 13 September 2020, Keppel REIT announced the acquisition of Pinnacle Office Park on New South Wales, Australia for S$303mn.
We reiterate our view that offices will remain relevant due to the value-added by mentorship, collaboration, corporate culture and creativity, which are best effected through physical interaction. We expect some attrition in office demand from downsizing or experimenting with remoting working, however the maintenance of an office address will remain the dominant trend.
In suburban malls, tenant sales have recovered to normalised levels despite shopper footfall being c.40% below normalised levels due to capacity control measures, implying that shoppers are becoming more efficient with their trips to the malls and higher conversion rates. Meanwhile, shopper traffic at central malls has also recovered to c.-40% pre-COVID levels owing to the single-digit local infection cases throughout Phase 2 and gradual return-to-office.
We think that the recovery in tenant sales would return confidence to tenants, and right concern of the sustainability of traditional retail. Capacity constraint in malls and particularly in dine-in establishments are partially alleviated by more balanced customer-flow throughout the day. Tenants will benefit from the scale of e-commerce and membership initiatives by landlords, which will help to drive sales and customer stickiness, allowing retailers to compete with merchants selling on e-commerce platforms. We think retail operators like CMT and FCT will have greater success with their e-commerce/omni-channel strategy given the higher number of malls in their portfolios and the 1mn and 800k members on their membership programs.
As of 11 September 2020, Singapore has established Green Lane arrangements with 6 countries (Brunei, China, Malaysia, New Zealand, Korea and Japan). As international travel restrictions are progressively lifted, the need for dedicated isolation facilities for arriving and returning travelers will continue to provide marginal block-booking demand.
Recovery for the hospitality sector is expected to be slow in 2020, hinging on the vaccine timeline. We expect business travels to remain muted, spurred by reason for travel. Transaction-driven or top-management meetings will likely be among the first to resume. Staycation demand to help fill occupancies in the near-term.
Maintain OVERWEIGHT on the S-REITs sector
We continue to view REITs as a stable yield investment. We believe that SREITs may emerge stronger will more future-ready portfolios, resulting in a re-rating of the SREITs sector due to:
- Acceptance of higher gearing levels will benefit REITs
- COVID-19 accelerated phasing-in of future trends, creating opportunities for landlords
- Tried and tested – REITs remain an attractive yield play
- A better entry price – S-REIT yield spread at the -0.6 SD level
- Recovery in prices and low interest rates presents conducive environment for acquisition
Top-down view (unchanged)
We continue to prefer the Commercial and Industrial sub-sectors due to tapering office supply, and AEI and redevelopment opportunities. These two sectors remain more resilient, relevant and stable despite the pandemic.
The outlook for the Retail sector does look more optimistic as indicated by the V-shaped recovery in the RSI. However, we hold off on upgrading our sector view as we would like to see sustained leasing demand to compensate for the shorter WALEs of the sector.
We remain cautious on the Hospitality sector due to the continued restrictions on international travel.
Tactical bottom-up view (unchanged)
We continue to favour REITs with stability, diversification as well as near-term growth catalyst. REITs that can better weather through the weaker leasing environment and structural shifts are those with:
1) Well-distributed lease expiries 2) High-interest coverage; 3) Long weighted average debt to maturity; and 4) percentage of guaranteed revenue through “fixed” or “stable” leases.
The FTSE S-REIT index has been trading sideways for the past 4 months, with dividend yield hovering around 4.4% to 4.6%. Current dividend yield stands at 4.5%.
Similarly, dividend yield spread has been in the 3.6% to 3.8% range over the corresponding period. Current dividend yield spread of 3.5% is at the +0.11 SD level.
3MSOR at 0.2% is at 9-year lows, 155bps lower YoY, while the 10YSGS at 0.9%, was 84bps lower YoY.
SUBSECTOR MONTHLY INDICATORS
The RSI (Ex MV) made a “V-shaped” recovery with July’s figures down only 7.2% YoY. Discretionary trade categories such as recreational goods, watches & jewellery, departmental stores, furniture & household and fashion drove the recovery.
Computer and telecommunication equipment category maintained its second consecutive month of c.20% growth.
The FMCG segments, supermarkets (+30.8%) and mini-marts and convenience stores (+3.8%) remained in the green, albeit growth has slowed.
RevPAR improved 7.2ppts MoM, lifted by the Luxury, Upscale and Midscale segments, on the back of higher room rates and occupancy. We opine that this was due to the staycation take-up, as international borders remain closed. Staycation demand will likely be more pronounced in the following months.
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