- S-REITs serve as a good inflation hedge while remaining fertile hunting ground for dividend yields
- Risks to DPU are mitigated by healthy gearing levels and high proportion in fixed rate debts
- Opportunities include reopening plays which benefit from strong pent-up demand to travel
- S-REITs remains an essential component in the income part of our barbell portfolio construct
Singapore continues to be the preferred location for companies looking to set up regional headquarters and such a trend will underpin rental momentum across the retail and commercial segments within S-REITs. Strong demand, particularly from Tech giants amid tight supply, continues to support positive rental reversions. For instance, the upcoming Central Boulevard is turning into a CBD tech hub with Amazon potentially its fi rst anchor tenant. Other tech giants like Meta and ByteDance are also potentially exploring options at Central Boulevard.
Furthermore, pent up demand to travel is recovering fast as economies reopen, as evident in the broad-based recovery in revenue available per room (RevPar) for hotel REITs and improving occupancy rates and traffic footfalls across retail REITs in 1Q22.
On utility cost guidance from the S-REITs sector, utility costs typically comprise only between 1-3% of revenue, except for hospitality, where it ranges between 3-5%. Industrial and office sector utility costs are largely borne by the tenants. While hospitality may bear the brunt of the high costs, these could be passed on via room rates, given the strong demand and that these rates see ongoing adjustments. Retail landlords may have to bear higher utility costs as the pass-through mechanism may have some timing issues. Nevertheless, some of these costs could be offset with the return of atrium sales and parking income.
In the near term, as energy prices have spiked since the Russian-Ukraine war started, most S-REITs have relooked at their utility contracts to ensure the rates are substantially locked in to minimise the utility cost impact in FY22.
Interest rates sensitivity: According to DBS Group Research, based on management guidance and sensitivity analysis, a 25 bps increase in interest rates is estimated to have a 0.4-2.3% impact on FY22F distribution per unit (DPU).
Hospitality S-REITs’ key markets like (i) Singapore (c.40% of asset value) have substantially opened its borders with a robust line-up of MICE events in 2H22, while staycations are still key, (ii) Europe (c.15%) and Australia (14%) will likely shrug off the Omicron impact as international travel return. In Asia, we await the re-opening of Japan (c.13%) to tourists, and China, which are the next catalysts to drive a further hike in RevPARs.
Key risk on the S-REITs remains a prolonged and persistent spike in interest rates. We believe this will be largely mitigated by:
- Healthy gearing at around 38% vs the regulatory gearing limit of 50%
- High proportion in fixed rate debt (c.75% of interest cost)
- Low refinancing risks over the next two to three years, with staggered debt maturities of <11% of overall debt expiring in 2022 and <17% of debt expiring in 2023
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