• The S-REITs Index fell 3.1% in April after gaining 0.6% in March, following the Fed’s reiteration of its higher-for-longer interest rate stance. The top performer for the month was Cromwell European REIT (CERT SP, BUY, TP €1.91) – it gained 8% in April after the ECB signalled it would likely cut interest rates in June. The worst performer was Prime US REIT (PRIME SP, ACCUMULATE, TP US$0.12), which fell 17.6% as it has yet to refinance its US$480mn loan maturing in July 2024. The Singapore commercial sub-sector was the top performer in April, gaining 1.1% after better-than-expected positive rental reversion in 1Q24. The worst performing sub-sector was overseas commercial, which was down 8.3% in April, dragged by US office REITs as conditions remain challenging.
• S-REITs are now trading at a forward dividend yield spread of c.3% (-1.5x s.d.) and a P/NAV of 0.86x (-2x s.d.).
• We remain OVERWEIGHT on S-REITs but are selective. We favour REITs with a healthy balance sheet, strong sponsors, and improving operating metrics, such as REITs in the hospitality and retail sub-sector. Catalysts are expected from a pick-up in the economy, asset recycling, and interest rate cuts. CapitaLand Ascott Trust (CLAS SP, ACCUMULATE, TP S$1.04) and Cromwell European REIT (CERT SP, BUY, TP €1.91) are top picks.

SECTOR ROUND-UP

The Fed kept the federal funds rate unchanged at 5.25-5.5% for the sixth straight meeting on 1 May and remains cautious on interest rates cuts this year – it will need to see more positive signs that inflation is moving towards its 2% target. With lower interest rates, S-REITs will benefit from 1) lower financing costs, 2) higher dividend yield spreads over bonds, and 3) higher property valuations as cap rates compress. Furthermore, we expect deal-making to pick up pace with interest rates peaking. Therefore, we expect a sector recovery in 2024-2025.

1Q24 performance for S-REITs under over coverage was mostly within expectations, with rental reversions for office and retail coming in above our expectations. We noticed that many S-REITs are divesting non-core assets as part of their deleveraging strategy to lower gearing and strengthen their balance sheet. One example would be Prime US REIT (PRIME SP, ACCUMULATE, US$0.12), which recently divested One Town Center in Boca Raton, Florida, for a price of US$82mn, US$2.8mn below its most recent valuation. We think this divestment trend will continue into 2024-2025 as the transactions market gradually gains momentum.

Retail

1Q24 rental reversions exceeded our expectations. Frasers Centrepoint Trust (FCT SP, ACCUMULATE, TP S$2.38), CapitaLand Integrated Commercial Trust (CICT SP, non-rated), and Lendlease Global Commercial REIT (LREIT SP, BUY, TP S$0.83) had suburban mall rental reversions of above 7%. Suntec REIT’s (SUN SP, BUY, TP S$1.41) Suntec City Mall had rental reversions of +21.7%. Landlords noted that tenants are willing to pay higher rent as the outlook for tenant sales is strong. New demand is coming from Chinese, Korean, and Japanese brands expanding into Singapore. This is especially true for Chinese F & B brands as those brands see a lack of growth potential in China and seek to expand overseas.  

The Marcg 24 retail sales index (excluding motor vehicles) rose 2% YoY, extending the 9.5% growth in February 24. Most industries recorded YoY growth, with the food & alcohol and watches & jewellery industries outperforming at +17% and +14.1% YoY, respectively. Computer & telecommunications equipment was the biggest decliner, recording a 5.1% drop in sales YoY in Mar 24.

The F&B services index rose 5% YoY in March 24, extending the 14.8% growth in February 24. Food caterers and restaurants registered 13.5% and 7.1% sales growth, respectively. We think retail sales will remain resilient in 2024, boosted by the various government handouts.

Hospitality

1Q24 RevPAR continued to improve for REITs under our coverage. CapitaLand Ascott Trust (CLAS SP, ACCUMULATE, TP S$1.04) had portfolio RevPAR growth of 6% YoY, in line with pre-COVID RevPAR. Far East Hospitality Trust (FEHT SP, BUY, S$0.79) had hotel RevPAR increase 6.7% YoY, reaching 102.9% of pre-COVID levels.

Singapore’s international visitor arrivals grew 20% YoY in April 24 to 1.35mn, and they are 15% below pre-COVID levels (Figure 8). Visitor arrivals from China grew 2.4 times in April 24 and are now 27% below pre-COVID levels after the 30-day visa-free entry for Chinese citizens rolled out on 9 February 24.

RevPAR continued to grow (+20.5% YoY) in March 24 after gaining 7.6% YoY in February 24, supported by higher average daily room rates (+14.3% YoY) and occupancy (+4.4%pts). RevPAR was boosted by the Taylor Swift Eras Tour, which saw huge foreign demand. We think RevPAR will continue its growth trajectory in 2024 with a solid concert line-up and a packed MICE schedule in Singapore.

Office

Rental reversions for 1Q24 were better than we expected. CapitaLand Integrated Commercial Trust (CICT SP, non-rated) had a positive rental reversion of 14.1% for its office portfolio. Keppel REIT (KREIT SP, non-rated) and Suntec REIT’s (SUN SP, BUY, TP S$1.41) Singapore office portfolio had positive reversions of 10.9% and 11.4%, respectively. Tenant retention is high as tenants are unwilling to spend capex for new premises. However, demand for new space is largely only from smaller tenants.

Industrial

Logistics continues to be the star performer for industrial REITs, while business parks remain the laggard. This is except for China, where logistics is still expected to remain weak for the next few quarters due to 1) an influx of new supply into the market, 2) an increase in tenant incentives, and 3) subdued economic activity.

Source: Phillip Capital Research - 20 May 2024