Worst may be over for S-Reits: Eastspring, OCBC

Singapore

SOME analysts think the worst may be over for Singapore-listed real-estate investment trusts (S-Reits).

The market looks to be pricing in too much downside for retail and office S-Reits, said Eastspring Investments' head of client portfolio managers Adam Matthews and director of client portfolio managers Sarah Lien on Monday.

"The sector is oversold as the support measures have provided much-needed relief in the form of dividend deferments, an increase in the leverage ceiling from 45 per cent to 50 per cent, property tax waivers, and the ability to defer rents until cash flows are able to cover costs."

The S-Reits in general have not fared well in the Covid-19 environment, and are one of the weaker areas of the market on a year-to-date returns basis. But S-Reits remain an attractive investment in a low-rate and modest growth environment - typically the kind of backdrop against which these trusts perform best, Mr Matthews and Ms Lien noted.

In contrast with assumptions that weak sentiment, declining retail sales and lower transaction volumes are the new norm, Eastspring is taking a longer-term view and believes there are some opportunities. In Singapore, it is focusing on valuations and acquiring high-quality assets at discounted prices.

While the office segment is still under stress, demand will likely persist for Grade-A office space, not just from financial companies but also from firms in other industries such as e-commerce, fintech and social media, which have been moving into the central business district (CBD), Mr Matthews and Ms Lien wrote.

Besides, after the pandemic, larger firms are likely to diversify their staff across several locations, to take up space in suburban office complexes on top of having a CBD presence, for business contingency management.

Singapore's listed property equity space is trading at multi-year lows, offering good value and recurring dividend income for investors patient enough to wait for a recovery, which is expected to resume from Q3 or Q4 this year and into 2021, the pair said.

"We believe the worst of the equity drawdown is behind us and that the Singapore real-estate market looks cheap with upside potential, even when factoring in headwinds from Covid-19, rental concessions, extended social distancing and so on."

Likewise, OCBC Investment Research believes the worst is over for S-Reits after a difficult H1 2020, and is "overweight" on the sector.

The research team generally believes investors can view the glass as half full for the S-Reit sector over the medium- to long-term horizon, but recognises that there are still near-term uncertainties, it said in a market commentary.

OCBC will adopt a "balanced approach" towards investing in S-Reits. It recommends that investors stick with winners, such as those exposed to logistics and business parks, as well as S-Reits that have positioned themselves defensively in anticipation of a weaker outlook. At the same time, investors should complement these plays with S-Reits in "beaten down" sub-sectors with deep value and supported by strong sponsors.

The research team's top "buy" picks are Frasers Logistics and Commercial Trust with a fair value (FV) of S$1.59, Manulife US Reit with a US$0.84 FV, Mapletree North Asia Commercial Trust with a S$1.09 FV, CapitaLand Mall Trust with a S$2.29 FV and ESR-Reit with a S$0.45 FV.

Central banks' massive stimulus measures are likely to keep interest rates lower for longer, which will drive hunger for good-quality yield instruments such as selective S-Reits, OCBC said.

The hunt for yield has compressed S-Reits' yields with the FTSE Straits Times Reit Index now trading at blended forward distribution yield of 5.5 per cent, 1.4 standard deviations below its 10-year mean.

However, the Singapore government 10-year bond has also seen a sharp decline of 114 basis points (bps) since the start of 2019. This brings the current forward yield spread to 457 bps, which is 0.7 standard deviation above the 10-year average. "On a relative basis ... valuations of S-Reits are undemanding," OCBC wrote.