Following our retail and hospitality feature in the three-part series DBS’ S-REIT roundup, we conclude by taking a look at office and healthcare REIT sub-sectors that were covered in the DBS S-REIT investor conference.
Investors Takeaway: DBS Investor Conference S-REIT Roundup (Healthcare, Office)
Healthcare REIT Play
- First REIT
In 4Q17, First REIT completed a slew of acquisitions from Siloam Hospitals Yogyakarta and Siloam Hospitals Buton to Lippo Plaza Buton. DBS forecasts these acquisitions to drive First REIT’s earnings growth as it receives full-year contribution from the properties. While interest rate risks are a concern, DBS believes that there will be minimal impact on First REIT. Its average interest cost is only about 3.7 percent with roughly 92 percent of interest cost hedged into fixed rates.
Office REIT Play
- Cromwell European REIT
Cromwell European REIT offers investors a unique opportunity to invest in office, light industrial/logistics and retail assets in Europe. Unlike most S-REITs, Cromwell European REIT holds 88 percent of its portfolio in freehold or perpetual leasehold. Majority of Cromwell European REIT’s leases are linked to inflation indices to provide a built-in rental growth mechanism and hedge against potential rate hikes driven by rising inflation. DBS believes that Cromwell European REIT will give investors a good exposure to the European market. The continued economic recovery in the European region will continue to drive rental yield over the next three years.
- Mapletree Commercial Trust
Another best-in-class REIT is Mapletree Commercial Trust. Its portfolio comprises of mixed-use properties like VivoCity and Mapletree Business City Phase 1 (MBC1). These are two dominant properties in their respective locations and possess superior property attributes. As such, Vivocity and MBC1 are generally price setters when it comes to rent negotiations with tenants in addition to commanding premium rents. The manager has been looking into ways to improve the shopping experience at VivoCity and drive higher organic growth. So far, the manager has already started on an asset enhancement initiative (AEI) to decant 30,000 sqft of space from level 3 to higher-yield space at basement 1. DBS believes that any AEI will contribute more VivoCity’s top line.
- Keppel REIT
According to DBS, Singapore office properties are on a multi-year recovery. This is largely driven by undersupply over 2018-2020 where annual supply of new office is lower than take-up rate. But this will only apply to the Grade A office property market as investors seek shelter in quality assets. With one of the best-in-class office buildings in Singapore, Keppel REIT has much to gain from the flight to quality. DBS foresees the discount to Keppel REIT’s book value to close as the expected upturn takes place.
- OUE Commercial Trust
Just like Keppel REIT, OUE Commercial Trust is another quality Grade A office property REIT. Its prime properties like OUE Bayfront and One Raffles Place are well-located assets in the core CBD area. While there remains a slight risk of negative rental reversion, DBS is optimistic that rental reversions might turn out better than expected. DBS foresees the tight market supply to play a huge part in driving higher rental.
This is the final part of a three-part series on S-REITs. Click here for the roundup on Retail & Hospitality REITs.