Industrial Reits outperform in challenging first half

Singapore

INDUSTRIAL Reits - particularly those with data centre, logistics and business park assets - have proven to be the most resilient, outperforming the rest of the Singapore Reit (S-Reit) sector in the first half of this year, with retail and hospitality Reits bearing the brunt of the Covid-19 fallout.

According to head of OCBC Investment Research Carmen Lee, the S-Reits under her coverage saw distribution per unit (DPU) drop 28 per cent year on year for the first-half period.

All the sub-sectors registered negative DPU growth, with the worst being hospitality (-62 per cent), followed by retail (-45 per cent), office (- 20 per cent) and industrial (-14 per cent).

The rental reversion performance was slightly better.

CGS-CIMB analyst Lock Mun Yee noted that office Reits continued to enjoy positive rental reversion in the second quarter, although they were marginally lower compared to the previous quarter. Office properties also generally maintained high occupancies through renewal activities.

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Ms Lee from OCBC likewise believes rental reversions for most office Reits would still be positive in FY20, given the low base rents they had signed three years ago.

Among industrial Reits, Ms Lock described rent reversions as "mixed", with Ascendas Reit and Mapletree Logistics Trust reporting positive reversions, while Mapletree Industrial Trust (MIT), ESR-Reit, Frasers Logistics & Commercial Trust (FLCT) and ARA Logos Logistics Trust recorded slightly negative reversions. That said, portfolio occupancy and rental collection remained high, with deferments staying in low single-digit territory.

As for the retail sector, mall occupancies of retail Reits stayed high at above 98 per cent in the first half of this year, while rental reversion was either flat or better, mainly due to the rental assistance provided and early lease renewals completed prior to the outbreak of Covid-19.

But Ms Lock noted that although footfall fell 60-80 per cent and tenants sales dropped 20-60 per cent during the "circuit breaker", traffic recovery in the malls has been steady since the reopening in mid-June, already recovering to 50 to 70 per cent of last year's levels by mid-July.

Overall, the moderated rental outlook was also reflected in the 1.5 to 5 per cent devaluation of some office and retail Reits' investment properties, she added.

She said that Singapore's Reit-owned hotels reported 40 to 50 per cent declines in revenue per available room (RevPAR) in the first half, which was still better compared to overseas hotels, because they were supported by alternative businesses.

CDL Hospitality Trusts' overseas hotels reported year-on-year RevPAR decline of 30 to 80 per cent, Far East Hospitality Trust's serviced residences were relatively resilient with

RevPAU declining by only 4.7 per cent, but Ascott Residence Trust, the most diversified hospitality Reit, was hit by global border closures with RevPAU down 52 per cent in the first six months.

Alas for the hospitality sector, the low room rate outlook is expected to remain at least for the rest of the year, Ms Lee said. "We could see a mild sequential recovery in the second half of 2020 as more countries exit lockdowns and governments continue to mass-book hotels for people serving quarantine orders and stay home notices in countries such as Singapore, Australia and New Zealand."

RHB analyst Vijay Natarajan added that a particular geographical subsector - US office Reits - caught his eye in the first half.

This sub-sector has done well, with slightly better DPU growth than the market had anticipated. This is probably because unlike Singapore landlords, US office owners are not mandated to give rental rebates to tenants, and so far these landlords have mostly only offered some support to retail tenants which make up a very small part of their tenant base.

Meanwhile, with the Singapore government allowing S-Reits to extend the timeline to distribute their income from three months to 12 months, some Reits such as ESR-Reit, Sabana Reit, MIT, CapitaLand Mall Trust, Suntec Reit, OUE Commercial Reit, Parkway Life Reit, Starhill Global Reit and EC World Reit have chosen to hold back part of their income out of prudence.

While the regulatory leverage limit has also been raised to 50 per cent, most Reit Managers have continued to err on the side of caution and adopt a wait-and-see approach on the Covid-19 situation before making any acquisition moves. Inorganic growth has therefore been slow, given the decline in share prices and difficulty of carrying out physical inspections on potential acquisition targets.

That said, the pace is expected to pick up in the second half, most analysts say.

Mr Natarajan noted that market conditions have stabilised since the "circuit breaker", and banks are still lending, while the cost of debt remains cheap. "The top sub-sector for acquisitions will be industrial because most of the industrial Reits' valuations have caught up to pre-Covid levels, meaning most of them are trading at low cost of equity, and with low cost of debt, they will easily be able to do accretive acquisitions."

Analysts expect the data centre, industrial, and logistics sub-sectors to be most active in buying and selling properties. FLCT has started the ball rolling when it announced earlier in August that it was acquiring two properties in Australia and the UK from its sponsor Frasers Property, as well as selling its remaining half stake in a cold storage facility in Australia. MIT also announced last Friday that it was selling a Singapore data centre at Ayer Rajah Crescent to Equinix Singapore for S$125 million.

DBS Group Research analyst Derek Tan expects acquisition news from Frasers Centrepoint Trust, believing that the suburban retail Reit's acquisition of an additional 12 per cent in PGIM Real Estate Asia Retail Fund will bring it closer to acquiring the assets held under the fund.

The CapitaLand group of Reits is expected to see some activity, given that the parent has an annual target to divest S$3 billion in assets each year. Ascott Residence Trust may also consider purchases of multifamily properties from CapitaLand.

"Buying a hotel or serviced residence now would raise a lot of questions of whether you are buying it at the right price. No one knows. There is a big gap between buyer-seller expectations, so no one has blinked at this point in time.

"Sellers are not distressed because of low interest rates and buyers are waiting for the right opportunities."

Overall, deal pricing is expected to dip 2-3 per cent - not enough for buyers to take the plunge," said Mr Tan.