Retail Reits have priced in Covid-19 impact, say analysts

Singapore

RETAIL Reit prices have been blown cold by rental relief measures, and then hot again by the US Federal Reserve's surprise rate cut.

Analysts believe that current Reit prices have already either fully or partially priced in the impact of temporary rent-relief measures and will take reference from the Fed's rate movements from this point on.

A compilation by The Business Times shows that on average, the six Reits with exposure to Singapore malls have risen 4.3 per cent since the announcement of the federal funds rate cut. However, they are still 4.5 per cent below pre-Covid-19 levels.

Over a one-year period, however, they are still up 9.3 per cent, thanks to the meteoric double-digit price jumps of Frasers Centrepoint Trust (FCT) and Mapletree Commercial Trust (MCT).

For comparison, the FTSE ST Reit Index (whose constituents span subsectors such as office, industrial, retail and hospitality) has risen 5.3 per cent since Tuesday's rate cut, and is fairly flat compared to before news of the virus outbreak broke.

In the year to date, it has gained 3.5 per cent. Over one year, it is up 12.8 per cent. The rate cut has had no apparent impact on the benchmark Straits Times Index, which remains 8 per cent below pre-Covid-19 levels and 6.7 per cent below the year-ago levels.

CGS-CIMB analyst Eing Kar Mei said: "Whether rent rebates have been priced in or not, we recognise that it will just be a short-term impact. The most important thing is that benign interest rates will continue to support demand for Reits.

"In addition, Reits also have imminent completion of acquisitions that will bolster their share prices; examples are FCT's acquisition of Waterway Point and Mapletree Commercial Trust's acquisition of Mapletree Business City (Phase 2). These will help to buffer the impact." She had said in a March 4 report that according to her ground checks, the suburban malls of CapitaLand Mall Trust (CMT) remain resilient in shopper traffic and retail spending, but tenants at Ion Orchard continue to see soft sales.

"The market has unduly priced in 11 per cent distribution per unit (DPU) decline in FY20 (for CMT); we believe the impact will be less," she said, upgrading the stock to "add" with a higher target price of S$2.75, from S$2.68 previously. The stock closed at S$2.53 on Thursday.

She noted that recent share price weakness has provided buying opportunity for investors to gain exposure to the largest Reit in Singapore, once CMT has merged with CapitaLand Commercial Trust.

A late February report by Citi analyst Brandon Lee had showed that a "worst-case scenario" in which Reits dole out a maximum of half-month rental rebate will lead to DPU declines ranging from 2.3 to 5.7 per cent. This excludes further impact from lack of carpark income and ramped-up marketing expenses. With some tenants asking for as much as three months in rental rebates, the impact could be greater.

READ MORE: 1,000 CapitaLand tenants get rental rebates