Suburban retail S-Reits have smoothest recovery path: Credit Suisse

Singapore

RETAIL and hospitality Singapore-listed real estate investment trusts (S-Reits) were the hardest hit by the Covid-19 pandemic and should continue their recovery in 2021, according to Credit Suisse. This comes amid a return to normality for domestic mobility, and a slow improvement for international travel, it said in a sector note on Monday.

"We believe suburban retail has the smoothest path for recovery, while improvement for hospitality is dependent on international travel, which will be fraught with significantly more uncertainty," wrote analysts Nicholas Teh, Louis Chua and Terence Lee.

They noted that the sector's yield spread of 3.8 per cent is slightly wider than its five-year average of 3.6 per cent, mainly due to the retail and office Reits.

"We see scope for retail Reits to trade closer to the historical average given the domestic recovery, while the weak demand and overhang on work-from-home (WFH) concerns could mean office Reits' yields remain above average," the analysts said.

Credit Suisse has "outperform" recommendations for Frasers Centrepoint Trust (FCT), CapitaLand Integrated Commercial Trust (CICT) and Keppel DC Reit (KDC Reit). It has a target price of S$2.97 for FCT, S$2.60 for CICT and S$3.08 for KDC Reit.

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FCT and CICT were cited as beneficiaries of domestic recovery, while KDC Reit is preferred for potential acquisitions.

Separately, Credit Suisse has downgraded its call on Mapletree Commercial Trust (MCT) to "neutral", with a target price of S$2.26 from S$2.20 previously, as it believes that the market is already pricing in the recovery.

FCT units closed at S$2.63 on Monday, up S$0.03 or 1.2 per cent, while CICT units finished at S$2.32, up S$0.04 or 1.8 per cent.

KDC Reit units gained S$0.01 or 0.4 per cent to S$2.86 by the closing bell while MCT was up S$0.02 or 0.9 per cent to S$2.21.

According to Credit Suisse, industrial or data centre Reits will continue to be the focus for acquisitions, given relatively higher cap rates for assets, and low dividend yields facilitating distribution per unit (DPU) accretion. Within the sub-sector, Credit Suisse believes KDC Reit has the ability to "deliver the highest DPU accretion from acquisitions".

Outside of industrial or data centre Reits, FCT and MCT have several sponsor assets that can be acquired accretively, though there is no guidance on timing, the analysts wrote.

In addition, key structural trends to watch include WFH, e-commerce, as well as data centres, Credit Suisse noted.

"WFH remains a risk for the office sector with potential reduction of space by tenants, while a structurally higher proportion of the population working from home is a benefit for suburban retail," it said.

E-commerce continues to be a positive for logistics demand, while Credit Suisse is of the view that Singapore will maintain its status as the Asean hub for data centres, with rates supported by the lack of new supply.