Tighter Covid-19 curbs could hit retail, office Reits again

Singapore

WITH tighter curbs on gathering sizes, employee caps in the workplaces as well as smaller allowable event sizes, in response to the recent spike in Covid-19 cases, analysts believe that downtown retail Reits and office Reits could be affected once again in the near term.

RHB analyst Vijay Natarajan expects interest to rotate to industrial Reits, as landlords of downtown malls as well as retail areas in office districts face lower footfall from smaller office crowds and see their short-lived recovery reverse to how things were like back in "Phase 2" last year. Landlords may have to provide targeted support to affected businesses whose recovery momentum stalls.

"Technically, there would be some impact on office Reits also. The leasing momentum could slow down or take a pause once again," he added.

Meanwhile, there could be limited impact on hospitality Reits as tourist arrivals are expected to return only at the end of the year at the earliest. "Perhaps some of the MICE events will have to scale down which could affect their revenue, and hotels hoping to get some corporate meeting businesses might see attendance sizes reduced," he said.

The current tightened restrictions will last just over three weeks until end-May, but it is still uncertain how the situation will develop after that.

DBS Group Research said in a Monday report that retail and office Reits are not expected to revisit their troughs in March 2020, despite the increased volatility. This is because the government and the community are "better prepared" to curb the community spread, and the financial impact on landlords will likely be minimal.

The research house anticipates that Reits with a focus on more discretionary trades may see more near-term volatility. Besides SPH Reit and Starhill Global Reit, it also cited Lendlease Global Commercial Reit and Mapletree Commercial Trust.

DBS singled out Frasers Centrepoint Trust and noted that while its unit price may fall with its retail peers, it should be more "resilient" given its focus on "more essential trades" and as a "beneficiary of the structural change in work-from-home trend", as workers may patronise the malls on weekdays.

Given its pure office focus, DBS analysts also said that Keppel Reit should see the least downside, especially with its positive distribution per unit momentum from recent acquisitions.

The research house noted that although Reits have underperformed year to date, they may see rotational interest in the immediate term.

DBS maintains its preference for logistics focused names like Mapletree Logistics Trust and Frasers Logistics & Commercial Trust given the "expected earnings resilience", while noting that earnings of Mapletree Industrial Trust and other large-cap industrial Reits may "surprise on the upside".

Hospitality Reits had also "rebounded strongly" last year but returned a "flattish performance year to date", DBS analysts said.

While investors may grow impatient given the potential delay in the expected recovery in tourism from the second half of 2021, downside risk, especially for Singapore-focused hotels, is mitigated by the possible extension of the government block-booking hotels for quarantine purposes beyond the first half of 2021, the analysts said. This provides positive cash flow for "demand starved" hotels.

DBS expects overall impact on earnings to be marginal, although staycation demand in the near term may fall. It also noted that further mandatory rental rebates could be another risk, but is unlikely for now.

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