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31-08-21, 12:18
Overseas industrial, office properties lead rental reversions recovery for S-Reits
Aug 30, 2021
SINGAPORE-LISTED real estate investment trusts (S-Reits) with exposure to industrial and office assets - especially outside the Republic - might offer the best rental recovery prospects as the Covid-19 pandemic wanes.
In their most recent financial statements, for the period ended June, S-Reits reported mostly positive rental reversions for their industrial and office properties.
On the other hand, rental reversions were negative for Singapore retail malls in the period ended June 30, and revenue per available room (RevPAR) was mostly down for Singapore-based hospitality properties.
Results were mixed for the S-Reits with exposure to overseas retail and hospitality properties.
While not all the S-Reits disclosed their rental reversion figures, the general trend points to bigger gains in their overseas portfolios.
In particular, Ascendas Real Estate Investment Trust (Ascendas Reit) Ascendas Reit: A17U -0.97% reported average rental reversion of 3.4 per cent for its industrial multi-tenanted buildings in Singapore for Q2 but average rental reversion of 26.3 per cent for its properties in the US.
"Whilst the global economic outlook for 2021 is expected to be brighter compared to 2020, the pace of business recovery is likely to vary across sectors and geography," the Ascendas Reit's manager said in a press statement accompanying its results announcement on Aug 2.
As at June 30, the Reit's portfolio comprised over 200 properties in Singapore, Australia, the US, Europe and the UK. These include business spaces, logistics and distribution centres, industrial properties and data centres.
Industrial Reits favoured
Some analysts are steering investors towards S-Reits with exactly this sort of portfolio. "Industrial Reits remain our preferred exposure given their resilient distribution per unit (DPU), stronger asset under management (AUM) profiles, and multiple catalysts," said Maybank Kim Eng (Maybank KE) analyst Chua Su Tye in a sector note on Aug 18.
Ascendas Reit is one of Maybank KE's top "buys" among industrial S-Reits, alongside Mapletree Industrial Trust (MINT) Mapletree Ind Tr: ME8U 0%, whose portfolio comprises industrial properties in Singapore and North America.
"We expect acquisitions to gain traction, as the industrial Reits move past resilient DPUs in H1 2021, and grow their business park, data centre and logistics AUMs," Mr Chua added.
Coincidentally, OCBC Investment Research also names Ascendas Reit and MINT as its favourites among the industrial S-Reits.
"As the situation remains fluid with downside risks from the Delta variant, we would balance our reopening and recovery basket with Reits with more resilient and defensive income streams that are less susceptible to lockdowns," said OCBC analyst Chu Peng in a sector update on Aug 19.
Noticeably, over a third of both Ascendas Reit's and MINT's AUMs are outside of Singapore, providing an effective hedge against local Covid-related risks.
Cromwell E-Reit pivoting
Another Singapore-listed Reit with overseas properties that has found favour with analysts is Cromwell European Real Estate Investment Trust (Cromwell E-Reit) CWBU. The Reit's portfolio comprises mainly light industrial and logistics as well as office assets across Europe.
Cromwell E-Reit's industrial properties saw positive rental reversion of 5.8 per cent for Q2 and 4 per cent for H1.
"We remain excited on management's pivot into the industrial logistics sector which accounted for close to 39 per cent of assets as of June 2021," said DBS analysts Dale Lai and Derek Tan in a report on Aug 13.
"The Reit continues to increase exposure in this fast-growing sub-sector and targets to increase its portfolio exposure to 50 per cent in the medium term. This strategy, in our view, will drive a further compression in yields for the stock," the pair added.
The research house is maintaining its "buy" recommendation on Cromwell E-Reit, which the analysts say have "weathered the Covid pandemic well".
"With the continued optimism on Europe as it emerges from the worst of the Covid-19 pandemic, we believe that Cromwell E-Reit's portfolio will continue to perform well for the second half of the year," Mr Lai and Mr Tan said.
"Given the resilience of its portfolio and the ongoing competition for well-located and high-quality assets in Europe, we believe that there could be further cap rate compressions and portfolio valuation uplift at the end of the year," they added.
Office outlook mixed
On the office front, Cromwell E-Reit and other S-Reits with overseas office assets also saw higher rental reversions, as Singapore grappled with tightened Covid-19 measures in May.
"Rental reversions reported by (Singapore) office Reits were mixed, but skewed more to the positive side," said Ms Chu. For example, Suntec Real Estate Invest Trust (Suntec Reit) Suntec Reit: T82U -0.68% posted a positive rental reversion of 1 per cent for its Singapore office properties for the H1 ended June 30, and guided for positive rental reversion in FY2021.
While commendable, this was significantly lower than the rental reversions for overseas properties. Among the biggest gainers were Cromwell European Reit and Prime US Reit Prime US ReitUSD: OXMU -0.6%, whose office properties saw positive rental reversions of 13.7 per cent and 9.3 per cent respectively for H1.
"Uncertainties over longer-term work-from-home trends continue to cloud the sector outlook, but pace of vaccinations in different countries provides clues on how fast employees would return to the office," said OCBC's Ms Chu.
"In the US, property consultant firm Cushman & Wakefield cited commercial real estate platform VTS that tour activity of office space has increased more than 80 per cent from the start of the year to May. Furthermore, more companies are starting to sign longer-term leases again, as approximately 75 per cent of leases signed have tenures of four years or more," she added.
The way RHB analysts Loong Kok Wen and Vijay Natarajan see it, investors should keep their exposure to Reits that own quality assets as a long-term sustainable investment strategy.
"RHB Research's real estate team recently carried out a survey to evaluate Covid-19's impact on the office sectors in the region. Although there will be a greater propensity for employees to work from home more regularly - for health and safety reasons - office properties are here to stay," said analysts Ms Loong and Mr Natarajan in a report on Aug 23.
"Among all the sub-sectors, the office segment is second-best, preferred next only to the resilient industrial segment," they added. "Given the long-term trend, we advise investors to increase exposure to office Reits listed in Singapore."
Suntec Reit and Prime US Reit are RHB's top "buy" picks in the office Reits sub-sector.
For the first half ended June 30, Suntec Reit posted a 14.6 per cent increase in distributable income to S$118.2 million, driven mainly by the resilience of its office portfolio in Singapore, Australia and the UK.
Suntec Reit's office assets accounted for 84 per cent of its net property income and joint venture income in H1, with around 35 per cent of its portfolio located overseas.
Interestingly, the Reit seems to be cutting back on its Singapore assets while adding to its overseas portfolio. In June, it announced the divestments of a portfolio of Suntec City Office strata units and its 30 per cent interest in 9 Penang Road in Singapore. At the same time, it announced the acquisition of 100 per cent interest in The Minister Building, a Grade A office development in London.
Meanwhile, Prime US Reit's portfolio comprises office assets in the US. For Q2, the Reit saw positive rental reversion of 10.5 per cent.
"Flight to quality remains the overriding theme of the pandemic and is underscored as the recovery begins," the Reit manager said in a press statement accompanying its results announcement on Aug 3. And RHB's analysts agree that Prime US Reit's high-grade assets should benefit from evolving trends in workspaces.
"We believe the key factors for tenants selecting an office space would be more about the quality of space itself, with employee wellness and the ability to collaborate possibly being the top priorities. Flexibility and attention to sustainability are the other key considerations both landlord and tenants are likely to keep in mind," Ms Loong and Mr Natarajan said.
Aug 30, 2021
SINGAPORE-LISTED real estate investment trusts (S-Reits) with exposure to industrial and office assets - especially outside the Republic - might offer the best rental recovery prospects as the Covid-19 pandemic wanes.
In their most recent financial statements, for the period ended June, S-Reits reported mostly positive rental reversions for their industrial and office properties.
On the other hand, rental reversions were negative for Singapore retail malls in the period ended June 30, and revenue per available room (RevPAR) was mostly down for Singapore-based hospitality properties.
Results were mixed for the S-Reits with exposure to overseas retail and hospitality properties.
While not all the S-Reits disclosed their rental reversion figures, the general trend points to bigger gains in their overseas portfolios.
In particular, Ascendas Real Estate Investment Trust (Ascendas Reit) Ascendas Reit: A17U -0.97% reported average rental reversion of 3.4 per cent for its industrial multi-tenanted buildings in Singapore for Q2 but average rental reversion of 26.3 per cent for its properties in the US.
"Whilst the global economic outlook for 2021 is expected to be brighter compared to 2020, the pace of business recovery is likely to vary across sectors and geography," the Ascendas Reit's manager said in a press statement accompanying its results announcement on Aug 2.
As at June 30, the Reit's portfolio comprised over 200 properties in Singapore, Australia, the US, Europe and the UK. These include business spaces, logistics and distribution centres, industrial properties and data centres.
Industrial Reits favoured
Some analysts are steering investors towards S-Reits with exactly this sort of portfolio. "Industrial Reits remain our preferred exposure given their resilient distribution per unit (DPU), stronger asset under management (AUM) profiles, and multiple catalysts," said Maybank Kim Eng (Maybank KE) analyst Chua Su Tye in a sector note on Aug 18.
Ascendas Reit is one of Maybank KE's top "buys" among industrial S-Reits, alongside Mapletree Industrial Trust (MINT) Mapletree Ind Tr: ME8U 0%, whose portfolio comprises industrial properties in Singapore and North America.
"We expect acquisitions to gain traction, as the industrial Reits move past resilient DPUs in H1 2021, and grow their business park, data centre and logistics AUMs," Mr Chua added.
Coincidentally, OCBC Investment Research also names Ascendas Reit and MINT as its favourites among the industrial S-Reits.
"As the situation remains fluid with downside risks from the Delta variant, we would balance our reopening and recovery basket with Reits with more resilient and defensive income streams that are less susceptible to lockdowns," said OCBC analyst Chu Peng in a sector update on Aug 19.
Noticeably, over a third of both Ascendas Reit's and MINT's AUMs are outside of Singapore, providing an effective hedge against local Covid-related risks.
Cromwell E-Reit pivoting
Another Singapore-listed Reit with overseas properties that has found favour with analysts is Cromwell European Real Estate Investment Trust (Cromwell E-Reit) CWBU. The Reit's portfolio comprises mainly light industrial and logistics as well as office assets across Europe.
Cromwell E-Reit's industrial properties saw positive rental reversion of 5.8 per cent for Q2 and 4 per cent for H1.
"We remain excited on management's pivot into the industrial logistics sector which accounted for close to 39 per cent of assets as of June 2021," said DBS analysts Dale Lai and Derek Tan in a report on Aug 13.
"The Reit continues to increase exposure in this fast-growing sub-sector and targets to increase its portfolio exposure to 50 per cent in the medium term. This strategy, in our view, will drive a further compression in yields for the stock," the pair added.
The research house is maintaining its "buy" recommendation on Cromwell E-Reit, which the analysts say have "weathered the Covid pandemic well".
"With the continued optimism on Europe as it emerges from the worst of the Covid-19 pandemic, we believe that Cromwell E-Reit's portfolio will continue to perform well for the second half of the year," Mr Lai and Mr Tan said.
"Given the resilience of its portfolio and the ongoing competition for well-located and high-quality assets in Europe, we believe that there could be further cap rate compressions and portfolio valuation uplift at the end of the year," they added.
Office outlook mixed
On the office front, Cromwell E-Reit and other S-Reits with overseas office assets also saw higher rental reversions, as Singapore grappled with tightened Covid-19 measures in May.
"Rental reversions reported by (Singapore) office Reits were mixed, but skewed more to the positive side," said Ms Chu. For example, Suntec Real Estate Invest Trust (Suntec Reit) Suntec Reit: T82U -0.68% posted a positive rental reversion of 1 per cent for its Singapore office properties for the H1 ended June 30, and guided for positive rental reversion in FY2021.
While commendable, this was significantly lower than the rental reversions for overseas properties. Among the biggest gainers were Cromwell European Reit and Prime US Reit Prime US ReitUSD: OXMU -0.6%, whose office properties saw positive rental reversions of 13.7 per cent and 9.3 per cent respectively for H1.
"Uncertainties over longer-term work-from-home trends continue to cloud the sector outlook, but pace of vaccinations in different countries provides clues on how fast employees would return to the office," said OCBC's Ms Chu.
"In the US, property consultant firm Cushman & Wakefield cited commercial real estate platform VTS that tour activity of office space has increased more than 80 per cent from the start of the year to May. Furthermore, more companies are starting to sign longer-term leases again, as approximately 75 per cent of leases signed have tenures of four years or more," she added.
The way RHB analysts Loong Kok Wen and Vijay Natarajan see it, investors should keep their exposure to Reits that own quality assets as a long-term sustainable investment strategy.
"RHB Research's real estate team recently carried out a survey to evaluate Covid-19's impact on the office sectors in the region. Although there will be a greater propensity for employees to work from home more regularly - for health and safety reasons - office properties are here to stay," said analysts Ms Loong and Mr Natarajan in a report on Aug 23.
"Among all the sub-sectors, the office segment is second-best, preferred next only to the resilient industrial segment," they added. "Given the long-term trend, we advise investors to increase exposure to office Reits listed in Singapore."
Suntec Reit and Prime US Reit are RHB's top "buy" picks in the office Reits sub-sector.
For the first half ended June 30, Suntec Reit posted a 14.6 per cent increase in distributable income to S$118.2 million, driven mainly by the resilience of its office portfolio in Singapore, Australia and the UK.
Suntec Reit's office assets accounted for 84 per cent of its net property income and joint venture income in H1, with around 35 per cent of its portfolio located overseas.
Interestingly, the Reit seems to be cutting back on its Singapore assets while adding to its overseas portfolio. In June, it announced the divestments of a portfolio of Suntec City Office strata units and its 30 per cent interest in 9 Penang Road in Singapore. At the same time, it announced the acquisition of 100 per cent interest in The Minister Building, a Grade A office development in London.
Meanwhile, Prime US Reit's portfolio comprises office assets in the US. For Q2, the Reit saw positive rental reversion of 10.5 per cent.
"Flight to quality remains the overriding theme of the pandemic and is underscored as the recovery begins," the Reit manager said in a press statement accompanying its results announcement on Aug 3. And RHB's analysts agree that Prime US Reit's high-grade assets should benefit from evolving trends in workspaces.
"We believe the key factors for tenants selecting an office space would be more about the quality of space itself, with employee wellness and the ability to collaborate possibly being the top priorities. Flexibility and attention to sustainability are the other key considerations both landlord and tenants are likely to keep in mind," Ms Loong and Mr Natarajan said.