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With the economy gradually re-opening from June, DBS Research expects the manufacturing sector to be the fastest to recover.
Despite the government’s circuit breaker measures, operational metrics of Singapore industrial REITs have remained healthy with occupancies resilient across major industrial subsectors, revealed DBS Research.
“While the Circuit Breaker during April-May 2020 has resulted in landlords making provisions for rental deferments to assist tenants in their cashflow needs, the impact is marginal at around 2%-7% of portfolio rental revenue.”
It noted that impact to industrial tenants “have been more contained as the majority of them are operating as they are considered part of essential services that were exempted from the shutdown”. Property tax rebates coming from the government will also be fully passed on to such tenants as rent relief.
And with the economy gradually re-opening from June, DBS Research expects the manufacturing sector to be the fastest to recover post-COVID-19, “riding on the back of a recovery in the global economies from 2021 onwards”.
It noted that the government’s various assistance programmes are “positive” for the sector.
“The government has been quick to infuse impacted businesses with liquidity (access to loans), subsidies under the Jobs Support Scheme (JSS), and various grants to support cashflows for small medium enterprises (SMEs), which is the lifeblood of the manufacturing sector.”
“While landlords may have to cough up one month of rental rebates to their SME tenants, the downside risks to earnings is likely one-off.”
DBS Research is watching out for rent arrears given that some industrial REITs with Singapore-centric exposures retained some income in the first quarter of 2020 to meet demand to further potential rent rebates and deferments.
“Amid structural changes in the economy, we note minimal deterioration in arrears ratios for now, but are mindful of any potential weakness in the medium term.”
It is also watching out for balance sheet recapitalisation risk, since cashflows may be impacted in the near term.
“A worse than anticipated drop in cashflows could lead to lower asset values. A potential drop of 15% in asset values may see most of the S-REITS, especially the mid cap names, looking to recapitalise their balance sheets to keep gearing within 40%.”
As to valuations, DBS Research noted that large cap industrial S-REITs are trading at wide premiums compared to mid-cap REITs.
“The distinction between the large cap and mid cap S-REITs are now at the widest that we have seen as investors focus on the larger names for their liqudity, scale and ability to deliver stable earnings amid current market uncertainties.”
The larger cap industrial REITs – such as Ascendas REIT, Frasers Logistics & Commercial Trust, Keppel DC REIT and Mapletree Logistics Trust – are trading at an average of 1.51x P/NAV, while mid-cap REITs are trading at 0.89x P/NAV.
“With the ongoing COVID-19 pandemic, we favour the industrial subsector over other subsectors for its relative resilience in times of uncertainty and economic slowdown. Since falling to their multi-year lows in March 2020, the industrial REITs have rebounded with some of them trading close to levels seen in late 2019,” said DBS Research.
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Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this or other stories, email victorkang@propertyguru.com.sg