Brokers' take: Singapore Reits poised for full recovery, says CGS-CIMB

CGS-CIMB believes Singapore real estate investment trusts (Reits) are poised for a full recovery on expectations of a continuous improvement in footfall, which would support growth in tenant sales.

In a Thursday report, the brokerage singled out three Reits - Frasers Centrepoint Trust, Lendlease Global Commercial Reit (LReit) and SPH Reit - placing an "add" call on all three with target prices of S$3.01, 85.8 Singapore cents and S$1.06 respectively.

CGS-CIMB said it was "encouraged" by the Reits' performance, highlighting an improvement in occupancy quarter on quarter despite much lower rental support.

Tenant sales also showed a rebound as pent-up demand drove recovery for both suburban malls and downtown malls in the fourth quarter of 2020, the brokerage noted.

"While downtown malls' recovery was slower, we think it is still encouraging as tourists usually make up about 30 per cent of total spending at downtown malls," CGS-CIMB said.

Mapletree Commercial Trust is expected to perform best among the retail Reits, as its stable income and lower cost of equity place it in the best position for inorganic growth.

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CGS-CIMB further named Frasers Centrepoint Trust (FCT) as its top pick on expectations that the Reit will recover faster than its peers. The brokerage highlighted that FCT was the only Reit with "relatively flat" rental reversion. This was "impressive" but not unexpected, given the Reit's lower reliance on tourist spending and that about 45 per cent of its tenants are from essential services.

The brokerage also likes LReit for the long lease structure of Sky Complex, which should lessen the impact of negative rental reversions on overall income.

Also likely to do well is Starhill Global Reit. It has relatively low expiring retail leases of about 9 per cent in FY2021, with about 55 per cent of its income backed by long leases. At its current level, CGS-CIMB said, downside risks are priced in.

Commenting on the overall outlook for Reits, CGS-CIMB predicts a -3 to -20 per cent rental reversion for FY2021 as it foresees the leasing environment, despite improvements, to remain challenging "as tenants evaluate their budget and performance on a group-wide basis".

CGS-CIMB further expects valuations to remain stable in 2021, given the low asset valuation declines across the Reits.