Brokers' take: DBS expects near-term weaknesses for Reits with tightening of Covid-19 measures

WITH the recent spike in Covid-19 cases, the tighter measures may result in near-term weaknesses for "reopening trade" office and retail Reits (real estate investment trusts), DBS Group Research said in a Monday report.

However, the analysts noted that stocks are not expected to revisit the lows which happened in March 2020, despite the increased volatility. This is because the government and the community are "better prepared" to curb the community spread, and financial impact to landlords will likely be minimal, DBS said.

The research house anticipates that Reits with a focus on more discretionary trades may see more near-term volatility. This includes SPH Reit, Starhill Global Reit, Lendlease Reit and Mapletree Commercial Trust.

DBS singled out Frasers Centrepoint Trust and noted that while its stock price may fall with its retail peers, it should be more "resilient" given its focus on "more essential trades" and as a "beneficiary of the structural change in WFH (work-from-home) trend" as workers may patronise the malls in the weekdays.

Given its pure office focus, DBS analysts also said that Keppel Reit should see the least downside, especially with its positive distribution per unit momentum from recent acquisitions.

The research house noted that although Reits have underperformed year to date, they may see rotational interest in the immediate term.

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DBS maintains its preference for logistics focused names like Mapletree Logistics Trust and Frasers Logistics & Commercial Trust given the "expected earnings resilience", while noting that earnings of Mapletree Industrial Trust and other large cap industrial Reits may "surprise on the upside".

Hospitality Reits had also "rebounded strongly" last year but returned a "flattish performance year to date," DBS analysts said.

While investors may grow impatient given the potential delay in the expected recovery in tourism from the second half of 2021, downside risk, especially for Singapore-focused hotels, is mitigated by the possible extension of the government block-booking hotels for quarantine purposes beyond the first half of 2021, the analysts said. This provides positive cash flow for "demand starved" hotels.

DBS expects overall impact on earnings to be marginal, although staycation demand in the near term may fall.

Overall, one potential risk highlighted by the analysts include the heightened policing and regulation at malls if community cases rise. They also noted that further mandatory rental rebates could be another risk, but is unlikely for now.