Maybank Securities analyst, Krishna Guha, has kept his “neutral” call on Singapore REITs (S-REITs), preferring REITs which can grow rents while inflation continues to “stay above real growth” for the second consecutive year.
The team of economists at Maybank forecasts global growth to drift lower to 2.8% in FY2024 compared to FY2023’s growth of 3.3%. Inflation rates are also likely to have peaked and are moderating, although indicators on inflation expectations remain “sticky”.
Consequently, the analyst is more “guarded” on the timing and quantum of interest rate cuts globally.
He writes: “Rate cuts are expected to start from 3Q2024 with US benchmark rates ending FY2024 at 4.5% to 4.75%. In Singapore, gross domestic product (GDP) growth will be stronger and more balanced at 2.2% from 1.2% in FY2023.”
“Core inflation will remain sticky and above historical norms. The Monetary Authority of Singapore (MAS) will ease only in late FY2024 with the three-month Singapore overnight rate average (SORA) falling to 3.25% from 3.7%,” adds Guha.
Stock picks
With a myriad of factors influencing the different S-REIT sub-sectors, Guha is “agnostic” on the sector.
He notes that industrial S-REITs are well-owned and supply pressure has “kicked in”, while pandemic-induced low-base effects and reopening momentum have dissipated for retail and hospitality.
Meanwhile, offices grapple with hybrid work arrangements.
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“After the recent rally, valuations are stretched but CapitaLand Integrated Commercial Trust C38U (CICT) and CapitaLand Ascendas REIT A17U (CLAR) provide better risk-adjusted exposure to navigate a volatile year. Lendlease Global Commercial REIT JYEU (LREIT) gives an optionality on rate cuts,” writes the analyst.
Guha continues, noting that other preferred picks include AIMS APAC REIT (AA REIT), ESR-LOGOS REIT J91U (E-LOG) and Frasers Centrepoint Trust J69U (FCT), but distribution per unit (DPUs) could be impacted by recent divestments, delayed asset enhancement initiatives (AEI) and weaker consumer sentiment.
On the other hand, a “soft-landing scenario” in the US and an improving Chinese economy could reignite the sector, and REITs with a robust acquisition pipeline are likely to lead the next cycle.
Consequently, Guha leaves his estimates and target prices unchanged for the upcoming results but assuming risk-free rates don’t move, he foresees a 10% upside to target prices on average as rates are down 50 basis points (bps) from his current inputs.
Hospitality S-REITs
On the hospitality sub-sector, Guha observed a “saw-tooth” pattern in visitor arrivals.
He writes: “After jumping to 1.4 million in July 2023, it has retraced and pivoted to the 1.1 million level. Full benefit from reopening of borders is still to accrue with arrivals from China slower than expected.”
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The analyst links the absence of Chinese visitor arrivals with the state of the Chinese economy, and notes that corporate transient demand, which should gradually recover assuming economic expansion stays intact, is another contributing factor.
All in, however, Guha expects revenue per available room (RevPAR) to be dependent on occupancy as room rates come off with “patchy” arrival stats and rising supply, especially in the Orchard Road precincts.
Industrial S-REITs
Meanwhile, the industrial sector has done well with growth in spot rents and asset values in FY2023 across its key sub-sectors.
“Our concerns about business parks were partially validated by falling occupancy but spot rents grew 4% as we think lease transactions occurred for better spec assets commanding high rents. This trend is something similar to the office sector, which is not too surprising,” he notes.
Going into FY2024, Guha has noticed that the supply of warehouses have started to rise and anecdotally, rents are hitting a ceiling of $1.8 per square foot (psf) based on his discussion with third-party logistics providers.
He adds: “On the other hand, we also hear from supply chain personnel of fast-moving consumer goods (FMCG) and mid-market industrial players that order lead times have not yet gone back to pre-pandemic level. As such, we think rent growth will slow, barring another round of disruption.
As for data centres (DC), supply is “exploding” and demand seems to be “evergreen”, with the key worry of Guha being the retrofitting costs of scaling up from sub-10 megawatt (MW) facilities to the modern norm of over 20 MW capacity.
In addition, enabling artificial intelligence (AI) and conforming to ever-evolving green standards will need additional capital expenditure (capex) to bring state-of-the-art cooling and energy mix.
Meanwhile, as Singapore manufacturing shows green shoots with non-oil domestic exports (NODX) reversing its declining trend and growing by 1% y-o-y in November, Guha notes that industrial REITs could consequently be “back in vogue”.
He expands: “Especially interesting is the flatted factories as occupiers look to manage costs and the supply situation remains unchanged. While supply is becoming better for business parks at the margin, we expect better spec assets to attract demand while occupancy falls for older assets.”
Office S-REITs
Conversely, the office sector is likely to “remain a supply side story” with limited supply over the next two years.
Guha notes that IOI Central Boulevard, which is coming online this year, is 50% pre-committed.
As the set up of family offices is on a slower track, the demand for smaller spaces may be more muted, resulting in spot rent growth stalling, while any large lease renewal could create frictional vacancy pressure.
“Hybrid work arrangement going mainstream and cap rates trending below funding costs, in our view, provide good grounds to see more large-ticket transactions,” writes the analyst.
Retail S-REITs
Lastly, Guha understands that the retail sector “stacks up best” in terms of net supply with existing malls being repositioned.
He explains: “Island-wide stock will grow by less than 1% over the next two years. Meanwhile, the population increased by 5% y-o-y to 5.92 million as of June 2023. This compares to 5.7 million in FY2019, equating to 3.8% growth over the five-year period.”
As retail rents and prices show signs of stabilisation, fiscal support continues to defray living costs.
The analyst concludes that the key concern for the sector is consumer sentiment amidst sticky and elevated prices, uncertainty of economic growth and rising taxes such as goods and services tax (GST) and property.
“In addition, growth of tourist arrivals has stalled and tourism spending excluding accommodation is down 6% year-to-date (ytd) versus FY2019 despite nominal price growth. It seems to suggest that the purchase basket of tourists has changed,” writes Guha.
On the whole, Guha sees a “winding road to recovery” ahead for S-REITs. In his Jan 5 report, the analyst has named CICT, CLAR and LREIT as his picks. Guha likes CLAR for its liquidity and large-cap status while LREIT was selected as a high-yielding beta play.
