Our outlook for the Singapore physical property market in 2016 is bleak. In 3Q15, rents across most sectors have declined at an increasing pace (Fig 55). Along with the impending U.S. rate hike (most likely in December) the overall picture is dismal. SG property stocks have also started to correct over the last six months (FSTREI: -13%; FSTREH:-15%) and volatility is rising.
From a high level, SREIT sector DPU growth in 2016 of 5% will be largely driven by acquisitions made in 2015 (i.e. AREIT & CT), thereafter we expect growth to slow to 1.4% in 2017, dragged by the office sector (-1.5%). Overall SREITs’ gearing has also ticked up by 2ppt to 36% but is still below most REITs’ target gearing of 40% (mandatory gearing limit at 45%).
We have lowered SG Developers’ RNAVs by 3% on average, reflecting our negative views on the Singapore property market (only 0-60% of SG Developers’ RNAV exposure is in Singapore) and muted land banking exercise in 2015. We note that only 1 out of 8 government land sites (GLS) in Singapore launched YTD was won by listed developers under our coverage and land costs remain elevated. On our estimated resi price forecast (- 10%YoY) in 2016, PBT margins are expected to be pressured.
Developers over SREITs in 2016. While fundamentals are looking weak, we think investors should be bold, taking risk-adjusted opportunities. Heading into 2016, our strategy is to overweight SG developers vs. SREITs and be selective on high-quality REITs. Refreshing our estimates, we have a 36% TSR for developers vs. SREITs at 20%.
SG Developers – Stay away from Singapore. Stripping out stakes in listed REITs and book value of investment properties, the market discount to stub value is at a 5-year low. We also highlight that developers have de-risked their exposure to the weak Singapore residential market and gearing levels are not excessive. We continue to like developers with non-SG exposure with a steady stream of income (CAPL and GLP). While CIT has the highest SG resi exposure amongst the group, we think current valuations are too cheap to ignore.
SREITs – Buy resilient income stream, low gearing. Currently, the SREIT sector yield is trading at 6.5% and yield spread is close to the 5-yr historical average at 3.9%. However risk is skewed towards the downside. As we move towards 2016, investors should demand a higher yield as forward DPU growth slows from 5% in 2016 to 1.4% in 2017 and risk free rate increases towards our 2.75% target (+15bps). Depending on how wide the yield spread trades (+1std to max), we see 12-23% downside to prices from a top-down perspective. Our strategy is to stay defensive with retail (CT and MCT) and REITs with long term to maturity and WALE (CCT) and low gearing to take advantage of accretive ROIC redevelopment opportunities (AAREIT and MINT). (Read Singapore Property Report from Pg 40 - Pg 43)
Source : Macquarie Equities Research