Singapore REITs (“S-REITs”) offers high and stable dividend yields from exposure to the real estate sector (primarily in Singapore and Asia Pacific). It is the highest yielding REIT market among developed countries, yielding over 6% per annum on average.
But not all S-REIT sectors are the same and careful selection of your exposure to the right sector can help you outperform the general S-REIT market. In this article, we provide a summary of our views on the key real estate fundamentals (i.e. rental growth, supply pipeline, potential threats, and valuation) across the various S-REIT sectors that has a primary exposure to Singapore real estate.
Retail
Rental Growth★★
Rental growth for retail spaces is on a gradual decline, particularly for downtown shopping malls, with the area’s median rental declining 8-10% yoy based on the latest statistics from the Urban Redevelopment Authority (URA). While the pace of rental decline is slowing, the growth outlook of the retail sector remains fragile, hampered by structural changes in consumer behavior (e.g. e-commerce, emphasis on experiential spending vs. material goods) and the benign employment environment in Singapore. Consumers are expected to be cautious in discretionary spending given the uncertainty in job security and wages growth. We expect retail rents to at best be flattish over the next 12 months.
Upcoming Supply★★
Retail spaces that are coming online in 2017 and 2018 remains high, further dampening any potential growth in the sector. Based on URA’s statistics, retail vacancy rates is at it highest since 2010 at 8.4%. While the supply of retail spaces as a percentage of existing retail spaces is declining, the lack of strong leasing demand means that the existing vacancies will still take time for the market to absorb.
Threats★★
E-commerce has been a major threat to the retail industry. Mall operators are introducing new experiential concepts and more (diverse) F&B options to counteract this threat.
Trading Valuation★★★
Retail S-REITs are trading at an average yield of 6.3% and 0.96x P/NAV.
Preferred Sector Pick
We prefer Frasers Centerpoint Trust as its malls are strategically located in the heartland and are typically well connected to transportation hubs, positioning them as relatively more defensive plays and supported by sustainable footfalls. Its key assets are Causeway Point, Northpoint and Changi City Point which accounts for more than 80% of the REIT’s cashflows.
Office
Rental Growth★★
Average downtown office rents declined 10% yoy to S$9 per square feet per month based on latest URA statistics, due to weak leasing demand and a large influx of supply. With no significant drivers of office space demand in sight, we believe that there is still further downside for office rents of c.5-10%. However, we note that the pace of rental decline has slowed in the last consecutive three quarters and we could very well be seeing a bottom soon.
Upcoming Supply★★★
A record amount of office space is coming online downtown in 2017 which is expected to add pressure to occupancy levels in the near term. However, limited supply from 2018 to 2020 should provide support for office rents from 2018 onwards.
Threats★★
Office demand amidst a prolonged global economic slump and a continued contraction in the financial services, manufacturing and O&G sector.
Trading Valuation★★★
Office S-REITs are trading at an average yield of 6.1% and 0.84x P/NAV.
Preferred Sector Pick
We prefer CapitaLand Commercial Trust for its larger and more diversified portfolio anchored around the traditional CBD area of Tanjong Pagar and Raffles Place area. Rents in those areas are lower and less volatile (as compared to relatively less established Marina Bay area). The REIT also has two assets - Six Battery Road and HSBC Building - who are effectively freehold tenure in core locations (rare to acquire in Singapore going forward).
Industrial/Logistics
Rental Growth★★
Industrial rents on average has decline 7% yoy, based on latest JTC data, with the largest decline seen in the warehouse and multi-user factory segments. Rents in this categories should continue to see further declines given the general weakness in manufacturing and transportation sectors. We do not see any immediate improvement in demand drivers and expect rents to further decline c.5-10% in the near term. Business parks and single-user factory rents, however are typically more resilient. The former is anchored by leasing demands from the technology and media industry and the latter is usually driven by end-user demand.
Upcoming Supply★★★
Record supply in 2016 and 2017 and subdued demand should continue to restrict the growth of the industrial real estate sector. However, the bulk of the supply (c.60%) for the remainder of 2016 and 2017 are multi-user factories and warehouses. Most of the single-user factory supply are pre-committed build-to-suit solutions for established tenants, which should support occupancy levels for this sector.
Threats★★★
Weak export and manufacturing environment limits expansion plans. However, the governments focus towards automation and high technology industry should promote the usage of modern hi-end industrial and logistics space.
Trading Valuation★★★
Industrial S-REITs are trading at an average yield of 7.1% and 1.11x P/NAV.
Preferred Sector Picks
We like Mapletree Logistic Trust for its geographically diversified portfolio in Asia and its proven ability to develop modern logistics facility in the region. The logistics sector in Asia should do relatively well supported by demands from third party logistics players and E-commerce activities. Amazon has recently signed a lease for 100,000 square feet of spaces at Mapletree Logistics Hub at Toh Guan area.
Hospitality
RevPar Growth★★★★
The hospitality real estate sector is probably the only real estate sector experiencing a strong demand growth at the moment. Tourism arrivals grew double digit to date driven by growth in arrivals from China, Indonesia, India and Thailand. With a fundamental change in spending behaviour of millennial and the continual rise of the middle-income group in Asia, robust travel activities and travel spending in the region is expected to continue and should help drive the increase in room rates for the hotel industry in Singapore.
Upcoming Supply★★★
Large addition of new rooms in 2017 will keep RevPar growth subdue in 2017. However, we believe that occupancy (and the corresponding room rates) will pick up from 2018 onwards where there is limited supply coming online.
Threats★★
Unforeseen major medical epidemic in the region or geopolitical events could curtail the growth of the tourism industry in Asia Pacific. Tourism activities are typically less sticky and travel spending can fall off quickly, which impacts the hospitality REITs relatively quickly compared to other sectors.
Trading Valuation★★★
Hospitality S-REITs are trading at an average yield of 7.5% and 0.83x P/NAV. This is the highest yielding and arguably most undervalued sector among S-REITs.
Preferred Sector Pick
We like CDL Hospitality Trusts and Frasers Hospitality Trust for its diversified portfolio of hotels in key tourism markets, defensive master-leased structure for majority of their assets and its strong sponsor profile.
Conclusions
Based on the key factors we outlined above, we believe that the the hospitality S-REIT sector should outperform other S-REIT sectors in the mid-term. It is the only real estate sector where revenue growth is supported by robust demand at a time where other real estate sectors appear to have weak growth potential. Valuations for the sector also looks attractive as compared to the others.
We hope potential investors find this analysis useful. Please feel free to drop us a comment below on your thoughts.