■ Potential rate hike
The Singapore REITs (SREITs) have been relatively
volatile YTD due to the movement in the ten-year Singapore government bond
yield and changing expectations on the US rates. During the Fed taper in 2013,
they underperformed the market by 9.2%/9.6% in the three-/nine-month period
after the announcement. Additionally, during interest rate spikes in the past,
SREITs have been the clear underperformers. We do not expect the trend to
change this time around. CS's base case is for the US to start raising rates in
September 2015 with the ten-year treasuries hitting 2.80% (+48 bp) at end-
2016. Additionally, CS economists expect the three-month SIBOR to reach
2.0% by end-2016 which will raise the borrowing cost for REITs.
■ A triple whammy for office REITS
(1) We see the strongest headwinds for
the office sector with 4.6 mn sq ft of space entering the market in 2016/17E.
Historically, net demand has averaged 1 mn sq ft p.a., which implies that
occupancies could drop to 86.7% (-2.2 pp).
(2) Higher borrowing costs
would impact office REITs the most, particularly KREIT and Suntec, with a
100 bp rise in interest rates lowering DPU by 3.2-4.1%.
(3) Office asset NPI
yields provide the lease buffer to expanding cap rates. Top Underperform:
Suntec REIT, which could see further 19% downside if rates rise by 50 bp.
■ Retail environment most benign
Retail REITs are likely to benefit from
retail consolidation as tenants move to better-performing malls that are close
to transport hubs (e.g., Plaza Singapura, Westgate, Causeway Point,
Northpoint). We believe suburban malls will also provide more resilience in
the weak overall retail environment. Top pick: CT, the least exposed to
higher borrowing costs and suburban mall exposure.
■ Summary of material changes
We cut DPS estimates for Suntec, CCT and
KREIT to factor in lower occupancies, leading to 6-12% cuts to our TPs
. We also
lower our TP for MCT and upgrade CT to OUTPERFORM (from Neutral)
. (Read Report)
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Source : Credit Suisse Asia Pacific Equity Research
Labels: CapitaLand Commercial Trust, CapitaLand Mall Trust, K-REIT Asia, Mapletree Commercial Trust, S-REITs, Suntec REIT