Singapore REITs CIO Thematic Research | 2Q19 - DBS Bank
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CIO Thematic Research | 2Q19
Singapore REITs
Source: AFP Photo
Source: AFP
Source: Photo
AFP PhotoCIO INSIGHTS 2Q19 | 87
Theme III:
Singapore REITs
Jason Low, CFA An anchor in portfolios
Strategist
We have been highlighting that adopting a barbell strategy in portfolios would do well
Derek Tan from a risk-return perspective in a volatile and non-trending market. To recap, this strategy
Analyst involves heavily weighting both ends of the risk-asset spectrum; investors seek growth and
capital gains on one end, while ensuring stability through income generation on the other
– where real estate investment trusts (REITs) play a crucial role. With investor sentiment
weighed down by macro uncertainties amid global trade tensions, dividend-generating
assets like Singapore REITs (SREITs) serve as an anchor in one’s portfolio.
A dovish Fed to help SREITs’s outperformance. The recent dovish stance adopted by the
Federal Reserve, in light of global macro volatility, will likely support SREITs’s performance.
With investors now expecting a more dovish Fed, the SREITs sector has rebounded strongly
YTD, outperforming the Straits Times Index.
Despite hiking rates four times in 2018, the Federal Funds Target Rate is still near multi-
year lows (Figure 1). The neutral rate for this economic cycle is likely to be lower than that
in previous cycles. In a low-interest rate environment, dividend-yielding stocks like SREITs
stand out as investors seek higher returns through a more attractive yield spread.
A flat yield curve has historically been positive for SREITs. Based on our analysis of
the monthly SREITs data and the 10-year less 2-year yield curve since 2006, a flattening
yield curve has generally been positive for SREIT prices. When there is a flattening yield
curve, forward yield spreads offered by SREITs are relatively more attractive, compared
to periods with a positive upward sloping yield curve. As we believe the yield curve will
remain relatively flat till end-2020, this should bolster SREITs performance (Figure 2).
SREITs add resilience to portfolios through income generation. We continue to have
a positive long-term view on SREITs as they are a play on dividend demand from an ageing
population and fundamentally offer portfolio resilience. Historically, SREITs have been more
resilient to volatility as compared to the overall Index, with the sector’s declines shallower
than the market index since 2010 (Figure 3).CIO INSIGHTS 2Q19 | 88
Figure 1: Federal Funds Target Rate still near multi- Figure 2: Flat yield curve positive for SREIT
year lows performance
20 10-yr-2-yr yield curve (LHS) SREIT index (RHS)
18 3.0 1,200
16
2.5 1,000
14
12 2.0 800
10
1.5 600
8 Yield curve
projected to
6 1.0 remain flat 400
till end-2020
4
0.5 200
2
0 0.0 0
1980 1990 2000 2010 2006 2010 2014 2018
Source: Bloomberg, DBS Source: Bloomberg, DBS
Figure 3: SREIT sector more resilient than market index
4,000 SREIT Index Straits Times Index
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2010 2012 2014 2016 2018
Source: Bloomberg, DBS
SREITs offer attractive total Attractive total return potential. In the current low-growth and low-yield environment,
return prospects, with one the total return potential for SREITs is attractive, with its dividend yield providing a head
of the highest yield spreads start on returns. The sector now trades at 1.1x P/NAV and offers a forward dividend yield
globally of 5.8% (Figure 4). Indeed, compared to global peers, SREITs have the highest dividend
yields and one of the highest yield spreads (Figure 5). This is especially crucial in view of
Asia’s ageing population – dividend-yielding equities provide regular cash flow that serve
as a form of passive income.CIO INSIGHTS 2Q19 | 89
Figure 4: SREITs offer the highest dividend yields globally
Current yield
7%
5.8% 5.7%
6%
5.3% 5.2%
5.0%
5%
4.3%
3.9% 3.9%
4% 3.7%
3%
2%
1%
0%
Singapore Japan Australia Thailand HK REIT Malaysia US REIT Europe UK REIT
REIT REIT REIT REIT REIT REIT
Source: Bloomberg, DBS
Figure 5: SREITs offer one of the highest yield spreads across the world
Current yield spread
6%
4.9%
5%
4.0%
4% 3.8%
3.6%
3.2%
3%
2.5%
2.0%
2%
1.2% 1.3%
1%
0%
Singapore Japan Australia Thailand HK REIT Malaysia US REIT Europe UK REIT
REIT REIT REIT REIT REIT REIT
Source: Bloomberg, DBS
Channel checks have Upward DPU growth trajectory, validated by channel checks. Our conversations
validated our expectations with SREIT managers and channel checks during the recent reporting season indicate
for 2-3% DPU growth that it is a “landlord market”. The fact that brighter prospects are expected across most
sectors, coupled with earnings uplift from past acquisitions, should underpin DPU growth
momentum. Channel checks show that office REITs managers appear most upbeat,
while retail, industrial, and hotel SREIT managers are turning more positive about growth
prospects. This has validated our FY19-20F DPU growth expectations of 2-3%, with further
upside expected from acquisitions.CIO INSIGHTS 2Q19 | 90
Prefer suburban retail and Favour sectors that are more resilient to economic changes – suburban retail
industrial REITs and industrial REITs. We favour suburban retail and industrial REITs for their defensive
characteristics. Specifically, we prefer the resilience from exposures to industrial space
including warehouses, business parks, and neighbourhood retail malls, because of their
fairly sticky demand and domestic focus. These also offer relative resilience and lower
downside risks to earnings.
Suburban malls to benefit Suburban retail malls benefit from a natural catchment of consumers. Despite
from natural catchment retail malls facing structural headwinds in the form of e-Commerce competition, we
of consumers and higher believe the suburban malls owned by retail REITs have a natural catchment of consumers.
proportion of non- They are typically well-located, connected to MRT stations, and account for a larger
discretionary spending proportion of non-discretionary spending which is difficult for online plays to dislodge.
Potential downward pressure from new supply is mitigated by the 80-90% pre-committed
occupancy for new malls slated to open over the next 12 months.
Industrial supply expected Industrial sector to benefit from expected recovery in industrial rents. An expected
to peak in 2018 and recovery in industrial rents should provide positive news flow for the industrial REIT sector.
moderate from 2019 Industrial supply is expected to peak in 2018 and moderate from 2019 onward. This, in
turn, should translate to 2-3% growth in spot rents. We prefer warehouse and business
parks exposure given their more inelastic demand. The higher absolute yield offered by
industrial REITs, between 6-8%, should provide a larger buffer against the impact of rising
rates. Any potential consolidation among the smaller industrial REITs could also boost the
sub-sector’s performance.
Figure 6: Industrial rental reversion trends improving
40%
Business Park Warehouse Factory
30%
20%
10%
0%
-10%
-20%
2012 2013 2014 2015 2016 2017 2018 2019F 2020F 2021F
Source: Bloomberg, DBS
REITs should be part of core REITS should be part of a portfolio’s backbone. Given its income-generating nature
portfolios and potential capital appreciation opportunities, SREITs should be a part of an investor’s
core portfolio, on one side of the “barbell”. The proportion of REIT holdings in one’s
portfolio will depend on the investor’s risk appetite, alongside other income-generating
investments.CIO INSIGHTS 2Q19 | 91 Disclaimers & Important Notes This information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its subsidiaries or affiliates (collectively “DBS”) and clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank. This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to you to subscribe to or to enter into any transaction as described, nor is it calculated to invite or permit the making of offers to the public to subscribe to or enter into any transaction for cash or other consideration and should not be viewed as such. The information herein may be incomplete or condensed and it may not include a number of terms and provisions nor does it identify or define all or any of the risks associated to any actual transaction. Any terms, conditions and opinions contained herein may have been obtained from various sources and neither DBS nor any of their respective directors or employees (collectively the “DBS Group”) make any warranty, expressed or implied, as to its accuracy or completeness and thus assume no responsibility of it. The information herein may be subject to further revision, verification and updating and DBS Group undertakes no responsibility thereof. All figures and amounts stated are for illustration purposes only and shall not bind DBS Group. This publication does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction to purchase any product mentioned in this publication, you should take steps to ensure that you understand the transaction and has made an independent assessment of the appropriateness of the transaction in light of your own objectives and circumstances. In particular, you should read all the relevant documentation pertaining to the product and may wish to seek advice from a financial or other professional adviser or make such independent investigations as you consider necessary or appropriate for such purposes. If you choose not to do so, you should consider carefully whether any product mentioned in this publication is suitable for you. DBS Group does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences, financial or otherwise, arising from any arrangement or entrance into any transaction in reliance on the information contained herein. In order to build your own independent analysis of any transaction and its consequences, you should consult your own independent financial, accounting, tax, legal or other competent professional advisors as you deem appropriate to ensure that any assessment you make is suitable for you in light of your own financial, accounting, tax, and legal constraints and objectives without relying in any way on DBS Group or any position which DBS Group might have expressed in this document or orally to you in the discussion. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of the Information, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version. This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
CIO INSIGHTS 2Q19 | 92
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authorised and regulated by the Financial Conduct Authority (the “FCA”).GLOSSARY 2Q19 | 93
Glossary of Terms:
Acronym Definition Acronym Definition
ADAS advance driver assistance system DXY US Dollar Index
AEI asset enhancement initiative EBITDA earnings before interest, tax, depreciation, and
amortisation
AGM annual general meeting EC European Commission
AI artificial intelligence ECB European Central Bank
ARPU average revenue per user EM Emerging Markets
ASEAN Association of Southeast Asian Nations EMD Emerging Market debt
ASP average selling price EMEA Europe, the Middle East, and Africa
AV autonomous vehicles EPA Economic Partnership Agreement
AxJ Asia ex-Japan EPFR Emerging Portfolio Fund Research
bbl barrel EPS earnings per share
BI Bank Indonesia ETF exchange-traded fund
boepd barrels of oil equivalent per day EU European Union
BOJ Bank of Japan EV electric vehicles
bpd barrels per day FCF free cash flow
BV book value FDI foreign direct investment
CAA CIO Asset Allocation FOMC Federal Open Market Committee
CAGR compound annual growth rate FFO funds from operations
capex capital expenditure FX foreign exchange
CAR capital adequacy ratio FYP first-year premium
CASA current account saving account GCC Gulf Cooperation Council
CBIRC China Banking and Insurance Regulatory Commission GDP gross domestic product
CDS credit default swap GFC Global Financial Crisis
CEO chief executive officer GGM Gordon Growth Model
CET1 common equity tier 1 GMV gross merchandise volume
CFO chief financial officer GRE government-related entity
CFTC Commodity Futures Trading Commission GSIB Globally Systemically Important Bank
CIS Commonwealth of Independent States HNW high net worth
CNNIC China Internet Network Information Center HY high yield
COC change of control IEA International Energy Agency
CPI conusmer price index IG investment-grade
CPTPP Comprehensive and Progressive Agreement for Trans- IMF International Monetary Fund
Pacific Partnership
CRM customer relationship management IPO initial public offering
CSRC China Securities Regulatory Commission ISM Institute for Supply Management
DCF discounted cash flow IT information technology
DDM dividend discount model JGB Japanese Government Bond
DM Developed Markets JV joint venture
DPS dividend per share KPI key performance indicator
DPU distribution per unit LatAm Latin AmericaGLOSSARY 2Q19 | 94
Acronym Definition Acronym Definition
LNG liquefied natural gas QFII Qualified Foreign Institutional Investor
LTV loan-to-value QSR quick-service restaurants
M&A merger & acquisition R&D reseach & development
MAS Monetary Authority of Singapore REIT real estate investment trust
mmbbl million barrels RM relationship manager
mmbpd million barrels per day RMB renminbi
MREL minimum requirement for own funds and eligible ROA return on asset
liabilities
MRO maintenance, repair, and operations ROCE return on capital employed
NAV net asset value ROE return on equity
NII net interest income ROI return on investment
NIM net interest margin ROTE return on tangible equity
NPC National People's Congress RQFII Renminbi Qualified Foreign Institutional
Investor
NPL non-performing loan RRR reserve requirement ratio
O&M offshore and marine SAA Strategic Asset Allocation
O2O online to offline saar seasonally adjusted annual rate
OECD Organisation for Economic Co-oporation and SASAC State-owned Assets Supervision and
Development Administration Commission of the State
Council
OEM original equipment manufacturer SD standard deviation
OPEC Organization of the Petroleum Exporting Countries SOE State-owned enterprise
OPM operating profit margin SST Swiss Solvency Test
P&C Property & Casualty TAA Tactical Asset Allocation
P/B price-to-book TEU twenty-foot equivalent unit
P/E price-to-earnings TLAC total loss-absorbing capacity
P/EV price-to-enterprise value TLTRO targeted longer-term refinancing operations
P/NAV price-to-net asset value TP target price
P/TBV price-to-tangible book value TSR total shareholder return
P2F passenger-to-freighter UCITS Undertakings for Collective Investment in
Transferable Securities
PBOC People's Bank of China UST US Treasury
PCE personal consumption expenditure VNB value of new business
PLM product lifecycle management WTI West Texas Intermediate
PM portfolio manager WTO World Trade Organization
PMI purchasing managers' index YTD year-to-date
POE privately-owned enterprise YTW yield to worst
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