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Broker's take: Maybank KE remains positive on S-Reits in 'conservation mode'

MAYBANK Kim Eng (Maybank KE) on Tuesday said it remains positive on Singapore real estate investment trusts (S-Reits) that are now focusing on capital retention, with a sector bias towards industrial Reits and US office S-Reits.

"Slower leasing amidst uncertain macros should challenge near-term occupancies and rents, but cash-flow visibility remains strong, especially for industrial Reits, backed by rising overseas contributions and offices, with low expiring leases and positive reversions into 2020," wrote Maybank KE analyst Chua Su Tye in a research note.

Among the industrial Reits, Ascendas Reit remains the brokerage's preferred pick for its "diversified portfolio and tenancies", Mr Chua said, noting that the Reit has scaled up its overseas growth ambitions with a push into the UK and the US.

For the first quarter this year, occupancies were largely stable, with improvement in Singapore especially within the industrial (logistics) space, the report said. Rental reversions were mostly positive, reflecting earlier negotiations, though leasing activity has slowed considerably since April.

With the implementation of enhanced safe distancing measures, shopper traffic and tenant sales slowed, but a pass-through of government property tax rebates helped to mitigate a weaker March performance for retail, Maybank KE noted.

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Meanwhile, hospitality Reits were helped by government bookings that housed returning residents, though occupancies in the March quarter fell from their five-year highs to 54-65 per cent, resulting in 33-40 per cent year-on-year lower revenues per available room (RevPARs).

In addition, many S-Reits retained capital, with the highest 50 to 100 per cent recorded for the retail Reits.

The brokerage noted that it remains selective on retail Reits, which face yield expansion pressures, as well as hospitality Reits with declining RevPARs.

CapitaLand Mall Trust (CMT) remains the brokerage's top pick among the retail Reits. While Maybank KE has revised its estimates on the counter with a cut in near-term income, it favours CMT for its "scale, trading liquidity, and undemanding valuations" and sees near-term catalyst from a "better-than expected recovery in tenant sales post-Covid-19".

That said, the brokerage expects the full "circuit-breaker" impact to be felt in the second quarter, which would see a sharp fall in revenue and net property income, with effects of income loss from rent waivers.

Retail is likely to be the worst hit, as hospitality receives minimum fixed rents from their master leases. Meanwhile, overseas assets should back distributions per unit for industrial, while Singapore rents are now likely to bottom out in 2021, and tenancy risk while low, could rise, the report said.

"Office has low expiring leases in 2020 (at 5-9 per cent) and are set to deliver positive reversions given their low expiring rents. US-focused office Reits boast even lower lease expiries for 2020 (at 4-6 per cent) and higher dividend yields at more than 9 per cent," Maybank KE added.

Overall, the brokerage is of the view that sector-wide balance sheets are strong among S-Reits, with debt headroom boosted by higher leverage limits.

"We expect sector valuations to stay elevated against the negative macro undercurrents and a lower interest rate regime," Maybank KE noted.

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