'Light at the end of the tunnel' for S-REITS even as government mulls rental waiver bill: DBS

For SME tenants that are leasing non-retail properties such as industrial or office spaces, a cash grant of approximately 0.64 months of rent will be provided by the government, bringing total government support worth about one month of rent.

DBS Group Research analyst Derek Tan terms this a “targeted approach” by the government to aid the recovery of SME tenants during and after the circuit breaker period.

However, Tan notes that the proposed Rental Waiver Bill that is slated to be tabled in June 2020 will mean S-REITs are likely to see further deterioration in near-term cashflows.

This bill will mandate landlords to grant rental waivers to qualifying SME tenants who have suffered a significant revenue drop as a result of the Covid-19 pandemic.

Should the new bill be passed, Tan notes that retail landlords will have to bear two months of rental reliefs out of their own pockets, while industrial and office landlords will bear the cost for up to one month of rent.

“If the new Bill is passed by Parliament, qualifying SME tenants in retail properties will benefit from a total of four months of rental relief shared equally between the government and landlords,” says Tan.

“SME tenants of industrial and office properties will also be given some relief,” he adds.

While Tan says things remain uncertain in terms of the computation of the period of rental waivers in question, the bill is likely to have differing impacts on the various S-REITs.

This is due to the fact that most listed S-REITs have proactively given assistance with most providing between 0.4 months to 3.0 months of rental rebates, while office and industrial S-REITs have taken “a more targeted approach” in their own rental relief programs.

“Although the Bill is for a select group, the key lies in the eligibility criteria for the rental waiver that could differentiate those in real needs vs those who are opportunistic,” shares Tan.

“We expect that the Ministry of Law will provide more clarity taking into consideration a more equitable measure for all stakeholders,” he adds.

The way he sees it, most retail S-REITs, except Mapletree Commercial Trust and SPH REIT will have to cough up between an additional one month to 1.6 months of rental rebates.

Office and industrial S-REITs with a larger proportion of SME tenants, as well as mid-cap industrial REITs will have to do more for their tenants. These include Ascendas REIT, Mapletree Industrial Trust, Mapletree Logistics Trust, Suntec REIT and OUE Commercial Trust.

“Despite landlords (especially retail landlords) now having to dip more from their own ‘pockets’, we see some light at the end of the tunnel,” says Tan.

“This new Bill should help to quantify the fixed amount of rental relief and could be seen as some form of ‘closure’ to the rental support scheme extended by the landlords, removing the overhang,” he adds.

Nonetheless, Tan is hoping that the most recent slate represents the final round of rental waivers as businesses progressively start to reopen from July 2020.

Apart from these measures, Tan also acknowledges how the extended Jobs Support Scheme will ensure that businesses have sufficient means to adapt to changes brought about by the pandemic.

This is especially through the government’s efforts towards financing support for promising startups and to support businesses in digital transformation.

“The survivability of these businesses benefits landlords indirectly especially industrial REITs and to a certain extent, office REITs,” says Tan.

The brokerage’s top sector picks for the hospitality and residential sectors are CapitaLand and Ascott REIT as they are set to benefit the most from the extended Jobs Support Scheme.

For retail malls, Tan is banking on Frasers Centrepoint Trust and Lendlease Global Commercial REIT to benefit from the gradual reopening of malls in the first week of July.