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Singapore Property / REITs - The time is now

Shared By StockFanatic on Tuesday, May 8, 2018 | 8.5.18

■ The tide has turned for S-REITs to expand overseas

■ Boosting growth not the only consideration, protection against capital dilution is also critical

■ Scale and presence of sponsor in overseas markets key criteria for success

■ Acceleration of DPU growth enhances the attractiveness of S-REITs

Market becoming receptive to overseas expansion. Many investors have frowned upon S-REITs expanding overseas and moving away from a pure single country or Singapore focus, given concerns over FX risks but also unfamiliarity with an overseas market. However, that view is changing after our analysis of recent overseas ventures. This change of view among investors comes from a greater understanding that SREITs’ overseas expansion mandates have generally resulted in more sustainable DPU growth and in our view, builds resiliency across business cycles.

Re-visiting the benefits of remaining a pure-play in Singapore. While the conversation surrounding expanding overseas sometimes devolves into investors' preference to have the ability to pick and choose their country allocation, we believe this has the unintended consequence of leaving S-REITs and other longer-term investors vulnerable. In particular, we believe that it opens the REIT to a risk of a Singapore downturn or in any particular sector. This is especially in the industrial sector where capital values will be under pressure due to the relatively short land lease of 30 years. If industrial S-REITs are not proactive in expanding overseas, the risk is that NAV might be diluted over time.

Delivering a well-calibrated overseas strategy a key success factor; ability to tap sponsor a further positive. A successful overseas expansion strategy will hinge on the S-REIT manager delivering a wellcalibrated strategy that focuses on value creation on a risk-adjusted basis. We believe S-REITs with the support from a sponsor or local partners, offering scale and deeper market knowledge of an overseas market, will be better received by investors. Furthermore, a tighter focus on several countries rather than a scatter gun approach is key, in our view. Selective Singapore-focused S-REITs which we believe could potentially expand their mandate in the medium term include CCT, CMT, FCT, SPHREIT, SBREIT, FEHT and OUEHT.

Expansion will support S-REITs' performance. We believe with more SREITs expanding overseas, the boost to DPU growth is supportive of the overall S-REIT sector's performance and our view that yield spread should compress throughout the year towards the 3% level. The lack of growth has been a key concern and we believe that a well-thought overseas expansion strategy with a focus on delivering positive risk adjusted returns will benefit and help REITs negotiate past operational hurdles going forward. (Read Report)

Source : DBS Group Research

Posted on Tuesday, May 8, 2018 | 8.5.18
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