UOB Kay Hian has maintained its “overweight” rating on the Singapore REIT (S-REIT) sector as China relaxes its domestic Covid-19 measures from Jan 8.
Analyst Jonathan Koh writes in a Jan 3 report that hotels and serviced residences in Singapore, Australia and Japan will benefit from an influx of Chinese tourists, while malls and offices in China will see a recovery in shopper traffic and physical occupancy.
In his report, Koh notes that China had downgraded its management system for Covid-19 from a Class A disease to a Class B disease, which means it is an “infectious disease requiring basic treatment and prevention”.
This means that Covid-19 is now seen by the China authorities as a less virulent disease that will gradually turn into a common respiratory illness.
What this opening also means that it will reduce disruption to economic activities, with lockdowns being more targeted and quarantine restrictions domestically being more relaxed.
For example, people can travel freely within the country without presenting negative test results, and the border between mainland China and Hong Kong will be reopened by mid-January, according to Hong Kong chief executive John Leong.
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The Hong Kong-China border will be fully reopened in a gradual and orderly manner with the daily quota of travellers to be increased in stages. The requirement for quarantine was scrapped but Chinese visitors in Hong Kong have to observe three days of medical surveillance.
On the international travel front, China will remove the quarantine requirements for inbound arrivals, covering both foreigners and Chinese nationals, starting Jan 8.
It has scrapped its previous requirement of a five-day quarantine at a designated quarantine hotel followed by a three-days home quarantine. Travellers need to present negative results for Covid-19 tests taken within 48 hours of departure to be allowed into China.
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Koh says, “the easing of restrictions facilitates travel to China for business, education and family reunions.”
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However, even as the country opens up, it will have to face a wave of Omicron variant infections. Koh highlights that China is currently battling a severe winter outbreak of Covid-19, and the rapid easing of restrictions has resulted in a surge in Covid-19 infections.
On a nationwide basis, China is expected to emerge from the tsunami of new infections in February or March.
But there will be regional disparities as the infections sweep through China, as new infections at gateway cities Beijing and Shanghai have already peaked in December.
Following this, new infections in Guangdong, Hubei, Shangdong and Zhejiang provinces are expected to peak in January, and the peak for rural areas should occur later but could be brought forward due to the mass migration of people during the Chinese New Year, Koh thinks.
He also notes that 248 million people were said to be infected in the first three weeks of December. Koh says up to 60% of China’s population could eventually be infected, with Koh citing expert predictions that China could see up to one million deaths given China’s sizeable population of 1.4 billion.
In light of these, his top picks are Capitaland Ascott Trust (CLAS), CDL Hospitality Trust (CDLHT), Far East Hospitality Trust (FEHT), MapleTree Logistics Trust (MLT), MapleTree Pan Asia Trust (MPACT) and Sasseur REIT. (see below for target prices)
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Note: CDREIT is CDLHT
CLAS will benefit from the recovery in domestic corporate travel in China, while its Asia Pacific portfolio - making up 61.4% of its asset base- will benefit from the reopening in Mainland China.
On a standalone basis, its five serviced residences in Mainland China accounted for 4.3% of total assets.
FEHT and CDLHT will see their recovery powered by their Singapore hotels as Chinese tourists come back to the city-state, with Koh says that Singapore hospitality assets will benefit from
the return of visitors from Greater China, which accounted for 23.9% of total visitor arrivals to Singapore during pre-pandemic days in 2019.
MLT will face slowdown concerns in the near term, as leases accounting for 16.3% of its portfolio net lettable area (NLA) will expire in 2HFY2023, of which about half comes from MLT’s China portfolio.
Koh says Tier 1 cities enjoy stable take-up for logistics space, supported by continued growth in domestic consumption, but Tier 2 cities are seeing slower take-up.
Management expects a slowdown over the next two quarters in 2HFY2023, especially for Tier 2 cities with large incoming new supply.
However, its prospects brighten with the reopening in Greater China. Koh points out that MLT will benefit from continued growth and dominance of e-commerce platforms in Greater China, and names like JD.com, SF Express and Cainiao are among its top 10 tenants
Mainland China and Hong Kong accounted for 21.1% and 23.1% of MLT’s portfolio valuation respectively as of Sep 2022.
For MPACT, its Festival Walk property in Hong Kong benefits from reopening of borders with Mainland China, which will spur further recovery in shopper traffic and tenant sales.” Mainland visitors accounted for about 25% of retail sales in Hong Kong before the Covid-19 pandemic.
Furthermore, a China reopening will improve business sentiment, and more employees are able to return to their offices in Shanghai and Beijing.
Leasing activities resumed at Zhangjiang Science City in Shanghai in June 2022 after the lockdown was lifted, driven by biomedical, semiconductor and artificial intelligence industries but rents are capped by an influx of new supply.
Finally, China’s transition to living with Covid-19 as an endemic conditions would reduce disruptions to Sasseur’s four outlet malls in Mainland China.
Two of its outlet malls located at Chongqing Bishan and Kunming were temporarily closed for 7 days and 11 days respectively in the third quarter of 2022.
A reopening will generate a recovery in tenant sales, and will lead to a recovery of domestic travel, which enhance shopper traffic and tenant sales at its outlet malls.
“Shopper traffic would recover once the current wave of Covid-19 infections subsides in February or March.” Koh writes.
In addition to these stocks, he also highlights Captialand China Trust (CLCT), describing it as the “largest China-focused REIT listed on the SGX.” CLCT’s portfolio comprises 11 shopping malls, five business park properties and four logistics park properties.
Retail, business parks and logistics parks accounted for 69.2%, 25.7% and 5.1% of CLCT’s gross rental income respectively as of September 2022.
