OCBC neutral on S-Reits amid tough environment

SINGAPORE — OCBC Investment Research is maintaining its “neutral” rating on Singapore-listed real estate investment trusts (S-Reits), saying the sector is expected to face continued volatility amid soft market conditions and a tough operating environment.

For the recently concluded calendar-year first-quarter earnings season, the research house said all 22 S-Reits that it covered posted results in line with its expectations. However, the distribution per unit (DPU) was largely subdued in a clear reflection of the challenging operating environment, with overall DPU growth contracting 0.9 per cent on a year-on-year basis, versus the 1.9 per cent year-on-year growth reported in last calendar year’s fourth quarter.

“This was partly bogged down by Reits which carried out rights issue exercises, namely OUE Hospitality Trust and OUE Commercial Reit. Even if we exclude the performance of these two Reits, DPU growth for our remaining coverage came in at only 0.5 per cent year-on-year,” said OCBC Investment Research in its research note.

Besides corporate actions, the industrial and hospitality sub-sectors registered relatively weak results in general, it noted. With the exception of Mapletree Industrial Trust, other industrial Reits under its coverage reported negative DPU growth, as the manufacturing and export landscape continues to be lacklustre. Meanwhile, the impact from the conversion of single-tenanted buildings to multi-tenanted buildings as well as down-sizing by oil and gas tenants also contributed to the weakness.

Despite some uplift to hospitality Reits from the biennial Singapore Airshow, lacklustre corporate demand and a tough competitive environment culminated in a drag on operating figures, the research house said.

DPU growth for hospitality Reits under its coverage fell 10.6 per cent year-on-year in the first quarter of the calendar year. Based on statistics from the Singapore Tourism Board, revenue per available room from January to March came in at S$204, representing a dip of 1.1 per cent year-on-year, it added.

Amid muted macroeconomic conditions and oversupply concerns across the various property sub-sectors, it was unsurprising that rentals continued to face downward pressure, the research house said, noting that REIT managers have also largely sounded a cautious tone over the outlook.

Grade A CBD core office rents dipped 4.8 per cent quarter-on-quarter to S$9.90 psf/month, representing the fourth consecutive quarter of decline, OCBC Investment Research cited property consultant CBRE as saying.

On the retail front, the Urban Redevelopment Authority’s rental index registered a 2.1 per cent quarter-on-quarter decline in the central area and a 1.4 per cent drop in the fringe areas. On the industrial front, JTC’s rental index showed quarter-on-quarter dips of a wider magnitude as compared to the fourth quarter across all segments, with the exception of warehouses, it noted.

The FTSE ST Reits Index has risen 2.6 per cent in the year to date, outperforming the 4.6 per cent decline in the benchmark Straits Times Index, Bloomberg data showed.