CLCT, Sasseur Reit outperform S-Reit peers amid China reopening optimism

THE largest China-focused real estate investment trusts (Reits) by market capitalisation have outperformed most of their peers listed on the Singapore Exchange (SGX) over the last six months amid optimism about China’s reopening.

CapitaLand China Trust (CLCT) and Sasseur Reit – the two largest among the five Singapore-listed real estate investment trusts (S-Reits) with purely China-based assets – currently rank among the top five performers when compared to the broader pool of S-Reits and listed business trusts, Bloomberg data showed.

CLCT has generated six-month total returns of 11.4 per cent as at Mar 6, assuming dividends were reinvested in the security. This is significantly better than the negative 8.6 per cent average total returns from its peers, and makes it the top performer among S-Reits over this period.

Meanwhile, Sasseur Reit’s total returns of 5.3 per cent also put it in fourth position, behind First Ship Lease Trust and Keppel DC Reit.

Analysts believe that the rebounding Chinese economy would continue to benefit these counters, even though challenges from rising interest rates could still weigh on the broader Reits segment.

Optimism from China’s reopening has been one of the key drivers of CLCT and Sasseur Reit’s outperformance over the last six months, said Vijay Natarajan, analyst at RHB Group.

“These two Reits are predominantly retail sector-focused and thus among the major beneficiaries of removal of Covid-related restrictions,” he added.

“(They) have also benefited from strong sponsor backing, prudent balance sheet and debt profiles which have helped them to navigate through the challenging funding environment for China-focused real estate players (over the) last two years.”

CGS-CIMB analyst Lock Mun Yee also noted that China’s reopening could result in increased mobility within the country and improving retail sentiment. The brokerage currently has an “add” rating for Sasseur Reit with a target price of S$1.00.

“We think the post-Covid normalisation would continue to provide tailwinds to Sasseur Reit with improved shopper traffic and tenant sales outlook,” she said. “This is in addition to Sasseur’s EMA (entrusted management agreement) rental structure which provides a stable rental base.”

Meanwhile, Derek Tan from DBS Group Research said the reopening of China could be positive for the China-focused Reits in terms of operational outlook with lesser rent rebates. Together with higher tenant confidence, this implies that “reversionary prospects” will likely improve.

DBS has “buy” calls on both CLCT and Sasseur Reit, with target prices of S$1.45 and S$1.05 respectively.

Recent economic data from China shows that activity has been rebounding since the government lifted its strict Covid-19 restrictions in December. Last week, data from the National Bureau of Statistics showed that the manufacturing purchasing managers’ index in February stood at 52.6, compared to 50.1 in January. This comes above the 50-point mark that indicates an expansion in activity.

But the growth outlook for the country also remains uncertain amid global headwinds from high inflation and interest rates.

On Sunday (Mar 5), China set a modest economic growth target of around 5 per cent for 2023 – its lowest in decades. This comes after the economy grew 3 per cent last year, missing the official target of around 5.5 per cent for 2022.

While Sasseur and CLCT have outperformed over the last six months, the three smaller China-focused S-Reits on the SGX have not fared as well.

BHG Retail Reit , Dasin Retail Trust and EC World Reit have generated negative total returns over the past six months. As at Mar 6, Dasin Retail Trust and EC World Reit rank among the worst-performing S-Reits, with six-month total returns of negative 30.7 per cent and negative 36 per cent, respectively.

“For Dasin and EC World, there were uncertainties due to their ability to refinance their debt which has resulted in the equity markets pricing in this risk,” Tan said.

RHB’s Natarajan also noted that, until these refinancing issues are fully resolved, he doesn’t expect investors to turn their attention towards these Reits.

“For BHG Retail Reit, it has successfully completed its refinancing, but it faces liquidity issues and is thinly traded thus drawing limited investor attention,” he added. The counter’s unit price has fallen 4 per cent in the past six months.

The broader pool of S-Reits has also faced recent price pressures amid renewed fears of sticky inflation and prolonged high interest rates. Similar to other S-Reits, CLCT and Sasseur Reit have seen their unit prices slip in the past month.

CGS-CIMB’s Lock said: “The performance of S-Reits was impacted by the prospect of potentially further rate hikes and higher rates for longer as US inflation data remains hot.”

Meanwhile, Tan also noted that the unit price pressure has come amid a spike in 10-year bond yields recently, and the China S-Reits have not been spared.

“As a subsector, (the) outlook remains more optimistic as operational conditions thaw within China itself,” he said.

“We have observed in past rate hike cycles that share prices tend to bottom out two months before a rate hike pause and return positively over the next six to 12 months after a pause in rate increases. I believe that prices should bottom from then.”

Natarajan added that some of the recent weakness could be due to some of the early exuberance from China’s reopening fading away.

“The tailwinds for China-focused S-Reits are closely tied to the pace of economic recovery (post-reopening) and rebound in consumer spending,” he said.

“China is among the few remaining economies with loosening interest rate policy as well as a step-up in government policy support to restart the economy, (which) could be a key catalyst for the sector.”