Following part one of this 2-part series where we highlight two of the key sectors (Financials, Industrials) to watch out for in the Singapore market, we zoom into Singaporeans’ favourite REIT sub-sectors. Among the REIT sub-sectors, the two that MBKE thinks every REIT lover should be watching out for are: Industrial REITs and hospitality REITs.
Investors Takeaway: 2 REIT Sub-Sectors To Add Into Your Watchlist By MBKE
- Industrial REITs
Continued Tailwind From Bottoming Out Of Supply
Within the industrial REIT sub-sector, industrial rents have started to stabilise and should continue to bottom out. MBKE attributes this to the low supply across all asset types with demand continuing to be skewed towards high-spec properties that are close to infrastructure and transport nodes. Rents for newer business parks at city fringes and high-spec properties are expected to firm up further with technology firms and co-working operators expanding selectively outside the CBD.
Apart from that, MBKE notes that the slowing demand for older properties should continue to motivate industrial landlords to embark on asset enhancement initiatives (AEI) or redevelopment. This is especially so since average land tenures for their existing properties are longer than for new industrial government land sales. Interestingly, the supply of industrial government land sales has also continued to be trimmed.
Another catalyst for industrial REITs will be overseas acquisitions. MBKE expects overseas acquisitions completed in the past 24 months to help lift DPUs for industrial REITs in 2019. Acquisition growth momentum is also expected to gain traction with deals focused on developed markets.
According to MBKE, large and mid-cap industrial REITs are expected to deliver 3 to 4.5 percent DPU compound annual growth rate. This is in contrast to the overall S-REIT’s DPU CAGR of 2.7-5.2 percent. Industrial REITs also offer 6.8 percent in FY19 dividend yield on average, compared to S-REIT sector’s 4.6 percent yield.
- Hospitality REITs
Turning Around For The Hospitality REIT Sub-Sector
The other REIT sub-sector that MBKE recommends investors to keep a watch for is the hospitality REIT sub-sector. Strong supply and poor tourist arrivals have been plaguing the hospitality REIT sub-sector, leading to trimmed RevPAR in the past few years. However, there are clear signs of evidence that Singapore hotels are ending their longest-ever RevPAR downcycle with improving RevPARs among the listed REITs.
Tourism growth, buttressed by Chinese inbound visitors and tight demand for rooms, have pushed occupancies up from 84 percent to a 5-year high of 89 percent in Jan 2019. Hoteliers have also started to see improved bookings from higher-yielding corporate customers. As such, MBKE is forecasting 5-8 percent RevPAR growth for 2019-2020 with a preference for hotels to serviced residences.
Expansion-wise, acquisitions have always been a key part of S-REITs’ DPU growth strategy. For hospitality REITs, overseas growth opportunities exist to help them achieve DPU growth for 2H19. According to MBKE, deal momentum (particularly in Europe) could pick up, especially given positive carry for EUR-denominated debt funding.
Among the hospitality REITs, MBKE thinks that CDL Hospitality Trusts and Frasers Hospitality Trust are best positioned for acquisition growth given their higher debt headroom and visible sponsor pipelines. MBKE also believes that CDL Hospitality Trust will provide stronger returns as its recent deals put it in a prime position to improve its yield alongside stronger demand-led fundamentals.