Tuesday, January 14, 2014

Singapore REITs Dec-13 results season- What are we expecting and what to look out for? (CS)

Singapore REITs
Dec-13 results season-
What are we expecting and what to look out for?

● Most S-REITs will be reporting their Dec-13 quarter results (Nov- 13 results for SPH REIT) in the coming weeks. We highlight some key trends and datapoints to look out for in the upcoming results.

● Prime Grade A offices will likely see moderate improvements in rents and occupancies, while older offices may see downward pressure on rents due to flight to quality. Retail tenant sales for suburban malls should remain resilient, but some malls like Bedok Point, JCube and IMM may be impacted by new openings.


● Industrial should see positive rent reversions for most sub-sectors (except for biz parks) but at a more moderate place. Competition in hospitality should remain stiff but we expect less of a hit to REVPARs going into 2014. We expect to see active refinancing by REITs with Fed tapering and anticipation of higher rates ahead.

● S-REITs may be less exciting now with the outlook of higher interest rates. However, as rate hikes are likely to be moderate, selectively, we believe some REITs should be able to deliver top line growth to offset the higher interest costs to deliver steady returns. Prefer defensive REITs: MCT, MLT and CMT. Riskreward also looks attractive for OUEHT, MINT and CDLHT.

S-REITs reporting Dec-13 results in the coming weeks
Most S-REITs will be reporting their Dec-13 quarter results (Nov-13 results for SPH REIT) in the coming weeks. We highlight some key trends and datapoints to look out for in the upcoming results season:

(1) Office leasing may see slight improvements:
Particularly for the Prime Grade A offices, we expect occupancies to see some positive uptick, with rents broadly in line with expectations (mild increases, given the higher occupancy base, i.e. less remaining space available for leasing). We expect to see low-to-mid teens rents S$psf/month for smaller areas, and low teens for 30,000 sq ft type leases. In our view, rent growth is unlikely to be meaningful due to oncoming supply pipeline (CapitaGreen, South Beach, etc.). Some of the older offices may see some rental pressure due to the musical chairs effect as some tenants consolidate into the newer office schemes. Capital values may be relatively unchanged, although we highlighted that in Nov-13, OUE Bayfront saw a 6.5% fall in valuation to S$1.01bn versus Dec-12's S$1.08bn citing a change in valuers and more conservative rent growth ahead of its commercial REIT listing. No change to 3.75% cap rates.

(2) Retail should continue its slow-and-steady growth:
Tenant sales for suburban malls are expected to continue to be resilient with low single-digit growth, led by the likes of F&B tenants, supporting positive rental and capital value growth for most malls. However, we expect some malls like FCT's Bedok Point and CMT's IMM and JCube to be impacted by competition with CMA:CAPL's Bedok Mall and Westgate's opening in Dec. Downtown, we expect positive newsflows on the take-up at Suntec City Mall's Phase 2 AEI but the rents may likely be lower than Phase 1's as Phase 2 has a larger proportion of anchor tenants including a supermarket.

(3) Industrial - Positive rent reversions continues but pace likely to moderate:
We believe rent reversions will likely continue, albeit at a more moderate pace, for industrial factories, flatted factories and warehouses given the healthy system occupancy of >90% and healthy demand driven by an anticipation of improving global growth. However, business parks take-up will likely remain weak due to new supply (on top of an existing system vacancy of ~22%) and competition from decentralised offices like the Metropolis, which we expect to translate into relatively lacklustre rent trends.

(4) Hospitality sector still hit by new supply:
With an incremental supply of ~3,200 rooms in 2013, STB's 11M13 data saw industry REVPAR -1.3%YoY (87% occupancy – flat YoY), led by -12.3% in the Upscale segment, -8.6% in Economy and -3.4% in Mid-Tier, partly offset by +9.4% in Luxury. We expect competition pressure to stay in 2014 with another 2,900 rooms expected to hit the market. However, we believe that the industry players are likely to react more rationally to competition, in view of relatively healthy system occupancies despite the higher supply. Therefore, we expect room rates to see flat-to-moderate increases going into 2014.

(5) Refinancing in focus with looming interest rate hikes:
On 18 Dec, the Fed announced it would start to taper in Jan-14, sending the US 10-year bond yield up to 3% mark, from 2.7-2.8% in the month prior to the announcement (SG 10-year now at ~2.6% levels vs 2.3-2.5% range). With the anticipation of higher interest rates, we expect to see more active refinancing among the REITs, with longer duration and higher % of debt fixed.

Be selective: Prefer the defensives
S-REITs may be less exciting now with the outlook of higher interest rates. However, as rate hikes are likely to be moderate, selectively, we believe some REITs should be able to deliver top line growth to offset the higher interest costs and deliver steady returns. S-REITs' recent underperformance of 9% versus the STI in 2013 also provides a better opportunity to accumulate quality names at cheaper valuations.

We prefer defensives like CMT, MCT and MLT. Risk reward also looks attractive for OUEHT, MINT and CDLHT. We maintain our neutral-to-negative stance on the office sector due to slow pre-leasing and oncoming supply – we have NEUTRAL ratings on KREIT, CCT and an UNDERPERFORM on SUN



Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 08/01/14

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