Broker's take: DBS sees hospitality sector as S-Reit 'dark horse' for 2020

THE hospitality sector may be the "dark horse" among Singapore real estate investment trusts (S-Reits) next year, leveraging a myriad of demand drivers, and a lack of supply growth, DBS Group Research said in an industry note on Wednesday.

According to DBS, the sector may be given a triple boost from an increased diversion in traffic within Asia, more conference travellers due to a robust event outlook, as well as merger and acquisition activities.

"With the sector largely under the radar amongst institutional investors, the ability to surprise on the upside is high. While we are only projecting a 1 per cent rise in DPUs (distribution per unit) in our estimates, we believe there could be upward surprise," said DBS analysts Derek Tan and Rachel Tan.

Far East Hospitality Trust remains as DBS's pick to leverage a recovery in the Singapore hospitality sector.

In addition, while most S-Reits still capitalise on the Singapore property cyclical upcycle, DBS has a preference for names that ride on structural growth trends, where demand remain inelastic to economic gyrations, it said.

These sectors in DBS's view, are within the data centres (Mapletree Industrial Trust and Keppel DC Reit), business parks (Ascendas Reit) and logistics (Mapletree Logistics Trust).

Other picks include Frasers Centrepoint Trust, for its dominance in the suburban retail space, and Suntec Reit for its higher than peer growth profile, riding on Singapore's office upcycle, the analysts said.

In general, DBS expects the sector's yield curve to steepen by 25 basis points in 2020 and 2021, bringing 10-year yields to 2.25 per cent.

"As S-Reits are typically priced off 10-year bonds, we are comfortable that current yield spreads of 3.7 per cent can be maintained, given similar pace of DPU growth. In fact, we see potential upside in growth momentum if S-Reits continue to acquire or tap their sponsors for acquisitions, a scenario which is not priced in at the moment," DBS explained.

It added that with proper safeguards, higher gearing limits for S-Reits will also serve as a catalyst for a sector rerate.

"Upcoming potential raising of the gearing limits by the Monetary Authority of Singapore (MAS) should be viewed positively, if proper frameworks and safeguards are in place to maintain sound financials standing for the S-Reits," the analysts noted.

Following DBS's analysis, every 5 per cent increase in the sector's gearing will imply up to S$10 billion to S$15 billion in new potential acquisitions. "We estimate that current sector yields of 5.5 per cent will see upside of 0.3 per cent to 0.4 per cent for every 5 per cent increase in gearing ratio."

That said, BT reported earlier this week that the leverage limit announcement for S-Reits might not come so soon.

S-Reits are currently subject to a leverage limit of 45 per cent, but MAS in July this year published a consultation paper proposing amendments and invited the industry to comment on how the leverage limit can be recalibrated.

For instance, the Reits could perhaps be allowed to leverage up to 50 per cent if they meet minimum interest coverage requirements; and for certain other Reits, possibly up to 55 per cent if they have shown good financial discipline.