Singapore REITs CIO Thematic Research | 2Q19 - DBS Bank

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Singapore REITs CIO Thematic Research | 2Q19 - DBS Bank
CIO Thematic Research | 2Q19

Singapore REITs

                                    Source: AFP Photo

                               Source: AFP
                                 Source:   Photo
                                         AFP Photo
CIO 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

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CIO INSIGHTS 2Q19 | 92

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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 America
GLOSSARY 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
QE        quantitative easing
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