Macro Strategy

Buy S-REITS; support for China credit
Joanne Goh, Neel Gopalakrishnan14 Dec 2018
    Photo credit: AFP Photo

    Equities: S-REITS as defensive play

    The Singapore economy is projected to grow by 3.0% in 2019, sufficient to support healthy demand translating into rising rents for most real estate sectors. We expect supply pressures to ease in the industrial sector as we have gone past the peak in supply in 2018. For the retail sector, supply is expected to peak in 2019 with the opening of Jewel Changi, but about 90% of the space has already been pre-committed. The office and hotel sectors will only see modest new additions. We expect office rents to rise 5-10% and hotel revenue per available room (RevPAR) by 3-4%. Industrial rents should increase by 3% with retail rents bottoming after falling over the last few years. On the back of an improvement in spot rents and impact from over S$8bn worth of acquisitions made in 2018, we expect the Singapore REITS Sector (S-REITS) to deliver steady 2% DPU (distribution per unit) growth in 2019 and increasing by a further 2.6% thereafter.

    S-REITs currently trade at a forward FY19/20F yield of c.6.3% with a yield spread of c.3.8% which is in line with the historical average yield. The high absolute yield in our view remains attractive given the prevailing macro uncertainty. Our preference is for retail and industrial sector REITS. Near term, we expect the retail sectors to deliver the fastest growth owing to the impact of inorganic growth from acquisitions and benefitting from asset enhancement initiatives. The industrial REITs, due their higher absolute yields, provide a better buffer to the impact of rising interest rates.

    Credit: Chinese credits receive NDRC policy boost

    The National Development and Reform Commission (NDRC) of China has announced that it would support onshore corporate bond issues from high quality enterprises. The criteria laid out by the NDRC include an onshore AAA rating, above average financial indicators in the industry (e.g. for property companies: more than CNY 150 bn of assets, more than CNY 30 bn of annual revenue and debt ratios of less than 85% (liability/asset)), no default in the last three years, no negative audit opinion in the financial statement in the “report period” and no violation of laws and regulations. Companies that meet the criteria can apply for a unified quota, valid for up to two years, to issue bonds. The bond issues cannot exceed 40% of the net assets of the companies. While there is no explicit mention of refinancing as a use of proceeds, we believe the new policy is supportive of Chinese credits as it increases access to onshore funds. Directly or indirectly, it should reduce refinancing concerns and reduce companies’ dependence on the offshore markets (USD bonds), at least for the leading Chinese high yield credits. Smaller and weaker credits, however, will likely face credit challenges in 2019, especially given the large wall of maturities both onshore and offshore (see DBS 2019-20 Outlook dated 3 December). Markets reacted positively to the news with Chinese high yield bonds, particularly property developers, trading up yesterday.

    Joanne Goh

    Regional Equity Strategist

    Neel Gopalakrishnan

    Credit Strategist – Emerging Markets

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