Time to ' bask in the sun' as recovery trends continue for these S-REITs: DBS

While the emergence of Omicron viral strain is a setback for Singapore&rsquo s reopening plans, DBS Group Research analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong  do not see domestic clampdown as a base case scenario for now.

" With the Singapore economy still strong, we see stronger domestic retail sales driving an approximately 5-6% rise in distribution per unit (DPUs) for retail and selected commercial S-REITs," write the analysts. 

It is now " time to bask in the sun" with S-REITs, write the analysts in a Dec 14 note, highlighting  Frasers Centrepoint Trust  (FCT),  Lendlease Global Commercial REIT(LREIT),  CapitaLand Integrated Commercial Trust  (CICT) and  Suntec REIT  (SUN).

Construction delays are pushing back office supply completions to 2023 or 2024, implying that rentals are likely to remain firm, say the analysts. " We like plays such as  Ascott Residence Trust  (ART) for its globally diversifed portfolio which will lead peers in a recovery."

DBS analysts project two-year DPU CAGR of some 8.0%. " The income disruption due to the Covid-19 pandemic in 2020 was unprecedented and some of its after-effects dragged our 2021 estimates down, especially in retail and hospitality sectors."
But portfolio net operating income (NOI) should gradually recover towards pre-Covid-19 levels, add the analysts. " As such, we project a robust 8.0% CAGR in DPUs over FY2022-2023F for the overall S-REITs sector, led by hospitality subsector and most of the subsectors achieving pre-Covid-19 levels in 2022."

" While the recent emergence of the Omicron variant has injected some uncertainty to the outlook in the near term, we believe that it will delay but not derail the current recovery trends," they add.

Retail and office S-REITs will  see strong rebound in earnings, say the analysts,  but DPUs will be marginally ahead of pre-Covid  levels. " The retail S-REITs were hit in 2020-2021 due to rental rebates which we believe to be a one-off. Additional rebates to tenants should be minimal in 2022 as recovery in consumer sentiment brings retail sales close to pre-Covid-19 levels,  while the arrival of tourists may push malls focused on discretionary shopping higher in 2022."

The focus in 2022 will be on the recovery in ancillary income sources such as improved foot traffic, eased restrictions on mall advertisements and promotions  and restart of atrium sales, they add.

Office S-REITs are projected to deliver better performance brought about by acquisitions and tapering of rental rebates, say DBS analysts.  " That said, with more companies adopting flexible working arrangements given improved productivity aided by technology, we see potential shadow space returning to the market in search of tenants."

Hotel S-REITs should mount a return of the &ldquo dark horse&rdquo in 2022, say analysts. " Hospitality-focused S-REITs should deliver strong growth in distributions as domestic travel momentum dials up with a boost from leisure travel given the establishment of vaccinated travel lanes (VTL). As such, we project a robust approximately 30% CAGR in DPUs over FY2022-2023F for this sub-sector."

Meanwhile, industrial S-REITs are a new economy play, say the analysts. " The industrial sector will remain in an oversupply situation in 2022 but we see the warehouse and business park space still remaining in a sweet spot. While organic growth prospects remain stable, acquisitions and development opportunities present upside to distributions as we expect acquisitions to continue."

" We believe that investors should take a balanced approach in their S-REIT picks for 2022, with a focus on growth and ability to deliver pre-pandemic DPUs. We also prefer S-REITs with pipelines which give them the ability to drive earnings surprises either through acquisitions or redevelopments."

 

 

Singapore office REIT sector still ' attractive' mixed commercial S-REITs preferred: DBS

DBS Group Research analysts Rachel Tan and Derek Tan remain positive on the Singapore office REITs sector as they see that the reopening of the country& rsquo s economy will continue to be a key theme in 2022. The Singapore government, which is looking at having more employees return to the office in 2022, is also another plus for the sector. 

The Singapore office REITs sector, which is currently trading at 0.9 times price-to-net asset value (P/NAV) on the whole, is deemed & ldquo attractive& rdquo to the analysts. 

Despite the work from home (WFH) default for the most of 2021, Singapore office rents registered a stronger recovery. This is seen in vacancy spaces at key buildings & ndash namely Asia Square Tower and CapitaSpring & ndash close to being fully committed, note the analysts. 

In addition, further delays in the completion of large new incoming supply such as Guoco Midtown and Central Boulevard Tower have provided a longer runway for office rents to recover, they add. 

Guoco Midtown is slated to be completed in FY2023, while Central Boulevard Tower is pegged to be completed in FY2024.
& ldquo The increasing & lsquo flight to quality& rsquo trend shows that good quality prime office buildings are still desired and will likely lead the recovery come 2022,& rdquo write the analysts from DBS. 

As 2022 marks the third year since the Covid-19 pandemic began, the analysts foresee that the adoption of hybrid working arrangements could increase, as companies increasingly adopt a more core, as well as flexible approach. This approach could lend more agility during times of uncertainty, say the analysts. 

& ldquo With limited new supply completions, based on leases coming due for the overall sector in 2022& ndash 2024, we estimate that up to 20% of potential downsizing from expiring leases in FY2022-FY2024 of up to 800,000 sq ft of shadow space is still manageable, in line with historical demand trends,& rdquo they write in a Dec 13 report. 

Within the sector, the analysts have expressed their preference for mixed commercial Singapore REITs (S-REITs) as they offer a stronger growth trajectory of 8% to 20% in FY2022. 

Mixed commercial S-REITs are likely to ride on the retail recovery following the low base in FY2021. They will also be a beneficiary from the return-to-office exodus. 

Of these S-REITs, Suntec REIT, CapitaLand Integrated Commercial Trust (CICT) and Mapletree Commercial Trust (MCT), are the analysts& rsquo top picks as they offer the strongest distribution per unit (DPU) growth in the FY2022 compared to their peers.

Retail S-REITs on the rise for FY2022

DBS reinstates coverage on CICT with " buy" , TP of $2.50