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Singapore REITs Summary

Core Content

This document outlines the current market outlook for Singapore REITs (SREITs), indicating that they are still in a de-rating phase. The analysis highlights the impact of economic and financial uncertainty, tightening credit conditions, rising interest rates, and currency depreciation on SREITs. It also provides updated ratings and target prices for various SREITs, with a focus on retail, office, and industrial sectors.

Main Points

• Overall Rating: SREITs are rated UNDERWEIGHT (Unchanged), and the market is still in a de-rating phase.
• Yield Expansion: SREITs have seen a 9% YTD yield increase, which is only halfway through the de-rating cycle, compared to previous periods where yields rose by 18% and 19% in 2007 and 2011.
• Market Conditions: The current environment includes rising economic risks, tighter credit conditions, and a weak economic backdrop, which are more pronounced than in previous de-rating periods.
• Sector Analysis:
  • Retail: Most negative, with expected rent declines and DPU cuts.
  • Office: Neutral, with expected rent declines and DPU cuts.
  • Industrial: Least negative, with a light at the end of the oversupply tunnel.

Key Information

Retail REITs

• SREITs de-rating is expected to continue due to weak demand and strong supply.
• CMT and FCT are downgraded to SELL, while Starhill is maintained at HOLD.
• SREIT yields have climbed 9% YTD, and the market has seen 1% annual rent declines in 2015-16, resulting in DPU cuts of c.3.7%.
• CMT has traded from -1SD to cycle mean, and is expected to move to +1SD, with a target yield of 6.75%.
• FCT, MCT, and Starhill are priced off CMT with target yields of 7%, 7.25%, and 7.75% respectively.

Office REITs

• CCT and Suntec REIT are downgraded to HOLD, while CapitaComm. Trust and Keppel REIT are also rated HOLD.
• Office rents are expected to fall 1% / 10% / 3% in 2015-17, leading to DPU cuts of c.9%.
• CCT has de-rated halfway between -1SD and cycle mean, with a target yield of 7%.
• KREIT and Suntec are priced off CCT at 7.25% and 7.6% respectively.

Industrial REITs

• MIT and Cache are downgraded to HOLD, while Ascendas REIT and Mapletree Ind. Trust are rated HOLD.
• Industrial rents are expected to decline 1-2% pa in 2015-16, leading to DPU cuts of c.1.7%.
• Areit has de-rated halfway between -1SD and cycle mean, with a target yield of 7.25%.
• MIT and Cache are priced off Areit at 7.5% and 9% respectively.

Analysts

• Joshua Tan: (65) 6231 5850 | joshuatan@maybank-ke.com.sg
• Derrick Heng, CFA: (65) 6231 5843 | derrickheng@maybank-ke.com.sg

Market Trends

• Global REITs: De-rated 15% (67bps) YTD, with yields moving up and spreads widening.
• Credit Conditions: Tightening credit conditions are a key factor in REIT de-rating, with credit spreads widening 42% since mid-2014.
• Interest Rates: Rising interest rates and economic uncertainty are adding pressure on SREITs.
• Currency Risk: The SGD depreciation is an additional de-rating catalyst in 2015, unlike previous periods.
• Supply/Demand: Oversupply in all asset classes is a significant concern, with retail being the most affected.

Conclusion

2015 presents more reasons for SREITs to de-rate compared to 2007 and 2011, due to a combination of economic risks, tightening credit, rising interest costs, and currency depreciation. The de-rating is expected to continue, with SREIT yields likely to rise further. The analysis suggests that the market is only halfway through the de-rating cycle, with more downside expected in the coming months.