SINGAPORE (THE BUSINESS TIMES) - CGS-CIMB believes that Singapore real estate investment trusts (Reits) are poised for a full recovery on expectations of a continuous improvement in footfall, which would support growth in tenant sales.
In a report on Thursday (March 4), its research team singled out three Reits - Frasers Centrepoint Trust (FCT), Lendlease Global Commercial Reit (LReit) and SPH Reit - placing an "add" call on all three with target prices of $3.01, 85.8 cents and $1.06 respectively.
Analysts said they are "encouraged" by the Reits' performance as they noted an improvement in occupancy quarter on quarter despite much lower rental support.
Tenant sales also showed a rebound as pent-up demand drove recovery for both suburban malls and downtown malls in the fourth quarter of 2020, they noted.
"While downtown malls' recovery was slower, we think it is still encouraging as tourists usually make up about 30 per cent of total spending at downtown malls," the analysts said.
Mapletree Commercial Trust is expected to perform the best among the retail Reits, said the analysts, who believe that the Reit's stable income and lower cost of equity place it in the best position for inorganic growth.
CGS-CIMB further named FCT as its top pick on expectations that the Reit will recover faster than its peers. Analysts highlighted the fact that FCT was the only Reit with "relatively flat" rental reversion, which they said was "impressive" but not unexpected, given the Reit's lower reliance on tourist spending and that about 45 per cent of its tenants are from essential services.
Analysts also like LReit, valuing it at a price-to-book ratio of 0.9 times due to the long lease structure of Sky Complex, which they think will lessen the impact of negative rental reversions on overall income.
Meanwhile, Starhill Global Reit was well-favoured by analysts for its relatively low expiring retail leases of about 9 per cent in financial year 2021, with about 55 per cent of its income backed by long leases. They valued the Reit at 0.6 times the price-to-book ratio and estimated a more than 7 per cent dividend yield.
Commenting on the overall outlook for Reits, analysts predict a minus 3 per cent to minus 20 per cent rental reversion for financial year 2021 as they foresee the leasing environment, despite improvements, to remain challenging "as tenants evaluate their budget and performance on a group-wide basis".
CGS-CIMB further expects valuations to remain stable in 2021, given the low asset valuation declines across the Reits.
