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.
The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.
The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.
The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.
DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.
To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.
The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.