While the emergence of Omicron viral strain is a setback for Singapore’s reopening plans, DBS Group Research analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong do not see domestic clampdown as a base case scenario for now.
"With the Singapore economy still strong, we see stronger domestic retail sales driving an approximately 5-6% rise in distribution per unit (DPUs) for retail and selected commercial S-REITs," write the analysts.
It is now "time to bask in the sun" with S-REITs, write the analysts in a Dec 14 note, highlighting Frasers Centrepoint Trust (FCT), Lendlease Global Commercial REIT (LREIT), CapitaLand Integrated Commercial Trust (CICT) and Suntec REIT (SUN).
Construction delays are pushing back office supply completions to 2023 or 2024, implying that rentals are likely to remain firm, say the analysts. "We like plays such as Ascott Residence Trust (ART) for its globally diversifed portfolio which will lead peers in a recovery."
DBS analysts project two-year DPU CAGR of some 8.0%. "The income disruption due to the Covid-19 pandemic in 2020 was unprecedented and some of its after-effects dragged our 2021 estimates down, especially in retail and hospitality sectors."
But portfolio net operating income (NOI) should gradually recover towards pre-Covid-19 levels, add the analysts. "As such, we project a robust 8.0% CAGR in DPUs over FY2022-2023F for the overall S-REITs sector, led by hospitality subsector and most of the subsectors achieving pre-Covid-19 levels in 2022."
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"While the recent emergence of the Omicron variant has injected some uncertainty to the outlook in the near term, we believe that it will delay but not derail the current recovery trends," they add.
Retail and office S-REITs will see strong rebound in earnings, say the analysts, but DPUs will be marginally ahead of pre-Covid levels. "The retail S-REITs were hit in 2020-2021 due to rental rebates which we believe to be a one-off. Additional rebates to tenants should be minimal in 2022 as recovery in consumer sentiment brings retail sales close to pre-Covid-19 levels, while the arrival of tourists may push malls focused on discretionary shopping higher in 2022."
The focus in 2022 will be on the recovery in ancillary income sources such as improved foot traffic, eased restrictions on mall advertisements and promotions and restart of atrium sales, they add.
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Office S-REITs are projected to deliver better performance brought about by acquisitions and tapering of rental rebates, say DBS analysts. "That said, with more companies adopting flexible working arrangements given improved productivity aided by technology, we see potential shadow space returning to the market in search of tenants."
Hotel S-REITs should mount a return of the “dark horse” in 2022, say analysts. "Hospitality-focused S-REITs should deliver strong growth in distributions as domestic travel momentum dials up with a boost from leisure travel given the establishment of vaccinated travel lanes (VTL). As such, we project a robust approximately 30% CAGR in DPUs over FY2022-2023F for this sub-sector."
Meanwhile, industrial S-REITs are a new economy play, say the analysts. "The industrial sector will remain in an oversupply situation in 2022 but we see the warehouse and business park space still remaining in a sweet spot. While organic growth prospects remain stable, acquisitions and development opportunities present upside to distributions as we expect acquisitions to continue."
"We believe that investors should take a balanced approach in their S-REIT picks for 2022, with a focus on growth and ability to deliver pre-pandemic DPUs. We also prefer S-REITs with pipelines which give them the ability to drive earnings surprises either through acquisitions or redevelopments."
