Singapore's Developers and REITs Rocky Road Ahead - DBS Bank
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36
SECTOR BRIEFING
number
DBS Asian Insights
DBS Group Research • March 2017
Singapore’s
Developers and REITs
Rocky Road Ahead
DBS Asian Insights SECTOR BRIEFING 36 02 Singapore’s Developers and REITs Rocky Road Ahead Derek TAN Equity Analyst DBS Group Research derektan@dbs.com Mervin SONG Equity Analyst DBS Group Research mervinsong@dbs.com Rachel TAN Equity Analyst DBS Group Research racheltanlr@dbs.com Singapore Research Team equityresearch@dbs.com Produced by: Asian Insights Office • DBS Group Research go.dbs.com/research @dbsinsights asianinsights@dbs.com Chien Yen Goh Editor-in-Chief Jean Chua Managing Editor Geraldine Tan Editor Martin Tacchi Art Director
DBS Asian Insights
SECTOR BRIEFING 36
03
04 Investment Summary
Key Themes
07 Developers: Catalysts Abound to Lift
Valuations From Multi-Year Lows
Diversification to Remain a Key Strategy
Improved Transactions in the Luxury End to
Continue
No Significant Price Cuts for Developments
Potential Land-banking Opportunities in
Singapore
More En-bloc Transactions in 2017
Merger and Acquisition Activity Could Pick up
Will Developers Need to Deleverage?
34 Singapore’s REITs: Déjà Vu
Key Issues in 2017
S-REITs’ Debt-Maturity Profile
Moderating DPU Performance
Potential Risk to Property Values in the Industrial
and Hospitality Sectors
Acquisitions May Be Difficult to Execute
48 AppendixDBS Asian Insights
SECTOR BRIEFING 36
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Investment Summary
T
he property market in 2017 will remain a tenants’ market as a higher supply of new
real estate will pose a risk to most subsectors. It will be another year of moderation
for the Singapore property market as we believe that most subsectors will continue to
see downside in rent and/or prices on the back of soft demand, given the economic
slowdown that may spill over into 2017.
Key Themes
Luxury end of residential market and office sectors bottoming out
The bright spot However, among the real estate sectors, we see brighter prospects in the luxury end of the
residential market and office subsector. We believe that luxury residential prices in Singapore
are attractive compared to luxury home prices in the region, thus we expect higher investment
transaction volumes in 2017, especially from foreign investors. The office sector is projected
to see slower rental declines of (5-10%), mainly due to better-than-projected take-up in
upcoming new buildings; we see the sector bottoming out by the end of 2017.
However, the retail, hospitality, and industrial sectors are still expected to feel the pressure
from projected negative net absorption, given excess supply.
Diagram 1. Singapore property clock
Source: DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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Developers and REITs to continue seeking overseas opportunities;
en-bloc deals to pick up in 2017
Diversification remains a key strategy but opportunities will be limited as currency volatility
rises. We believe that property developers and real estate investment trusts (REITs) will
continue their strategy to diversify overseas for growth but we expect the acquisition
momentum to taper on the back of increased currency volatility and higher cost of funds.
Cities that we believe remain attractive on a currency-adjusted basis are London in the UK,
Melbourne and Sydney in Australia, as well as selected Tier-1 cities of China like Shanghai.
Apart from acquisitions, REITs could also capitalise on the increased development limits (25% cap
versus 10% previously, subject to conditions) accorded by the Monetary Authority of Singapore
(MAS) to take on more asset enhancement to rejuvenate their portfolios and boost returns.
Hungry for land We expect developers to continue participating more in the first half 2017 government land
sales (GLS) programme as they look to replenish diminishing land banks – which will mean
that land prices are likely to remain firm. In addition, we expect to see more en-bloc deals,
especially in the luxury end of the market. These activities, in our view, should signal that
home prices would remain fairly stable in the coming years.
Privatisations, mergers, and acquisitions to pick up
Privatisations, mergers and acquisitions (M&A) in the developer space will pick up. We believe that
more listed property developers will take the delisting route, alongside the wave of privatisations
that we saw in recent years. This puts valuations of property developers in the spotlight again.
Reasons behind this trend could be (i) the sea of capital looking to be deployed in Asian real estate,
and (ii) strategic capital partners or major shareholders looking to recalibrate their strategies,
given the lacklustre capital markets, and thus capturing the upside in the medium term.
We believe that such M&A activity highlights the attractive valuations of listed developers,
namely City Developments, CapitaLand, Global Logistics Properties, and UOL.
Deleveraging a focus as interest-rate risks loom
A major wildcard In view of the uncertainty of the pace of interest-rate hikes in 2017, we believe that the
early refinancing and hedging of interest rates will be a key focus for developers and REITs
going forward. Noteworthy is close to S$6.3 billion worth of bonds (S$4 billion issued by
developers) expiring over 2017-2018, when issuers will need to source for refinancing or
alternative means to repay the bonds.
While we believe that refinancing for REITs are likely to be more straightforward, given
that credit is backed by consistent, recurring cash flow, we believe that certain developers,
especially those in the mid-cap space which have been more opportunistic in tapping the
bond market in recent years, could face more hurdles.DBS Asian Insights
SECTOR BRIEFING 36
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The bond defaults in 2016 by oil & gas firms have cooled investors’ interest in bonds, and
we believe that they will be more selective in future bond issuances. As such, the inability to
refinance expiring bonds could mean that issuers (developers or REITs) might seek alternative
financing sources such as banks or even equity.
Strategies
Singapore’s REITs – Capital preservation a key strategy
Rate hikes to limit We see more road-bumps to further outperformance by Singapore’s REITs (S-REITs) going
performance into 2017, especially as they are faced with a slowing distribution-per-unit (DPU) growth
profile of 1% amidst a rising interest-rate environment. DBS’ chief economist is projecting
four rate hikes by the Federal Reserve over the course of the year and, as a result, the
Singapore ten-year yield is expected to increase another 0.7% to a normalised 3%.
Capital preservation In an environment of low growth and rising interest rates, we believe that investors will look
is key at stock-specific catalysts to maintain relative outperformance within the sector. These are
S-REITs that provide (i) higher confidence in earnings sustainability and visibility, (ii) stronger
relative growth, and (iii) lower gearing which limits any impact of rising rates on distribution.
Our picks are Ascendas REIT (A-REIT), Keppel REIT (K-REIT), and Mapletree Commercial Trust
(MCT). In the mid-cap space, we like Croesus Retail Trust (CRT), Keppel DC REIT (KDC REIT),
and Frasers Logistics Trust (FLT).
Singapore Developers – Catalysts abound to re-rate
Potential policy Our call on the developers is mainly due to valuations that are supported by an improved
relaxation and M&A outlook. Firstly, we view current trading levels - price-to-net-asset-value of 0.75x and 0.65x
could lift sentiment price-to-revalued-net-asset-value – as attractive, given that developers are trading at close
to -1 standard deviation of historical levels. We believe that re-rating opportunities will
come from the following data points:
(i) improved sell-through rates for existing developments on the back of improved transaction
momentum,
(ii) potential relaxation of selective government policy in 2017 driving demand for homes
and investors’ sentiment, and
(iii) potential privatisation, M&A activity among developers or value-locking events like
asset divestments which will provide a lift for net asset value – and thus share prices – for
developers. Our picks are City Developments and UOL.
We see more
road-bumps for Risks
1. Faster-than-projected rise in shorter-term interest rates, which will negatively impact
Singapore’s REITs earnings and potentially capital values in the medium term.
in 2017 2. External shocks hitting GDP outlook and unemployment rates in Singapore, which will
have an impact on demand/supply dynamics.DBS Asian Insights
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Developers: Catalysts Abound
to Lift Valuations From Multi-
Year Lows
L
Attractive valuations ooking forward, we believe that Singapore’s developers can outperform the
S-REITs, especially as uncertainty in the number of rate hikes over 2017 could
mean limited re-rating opportunities for S-REITs.
We see re-rating catalysts for developers come 2017 on
1. expectations that the government may ease restrictions on the property market in
2017 as home prices fall by as much as 12-15% from the peak (the decline was
11% as of end-2016).
2. potential merger and acquisition (M&A) activity, and
3. improved balance sheets , thanks to expected asset recycling and deleveraging.
While we continue to expect Singapore’s residential prices to fall marginally in 2017,
most negatives have been priced in, in our view. We believe that we are closer to
the trough, especially with expectations that the government will likely tweak policy
measures to stem a further fall in prices.
Diversification to Remain a Key Strategy
Property developers have been acquiring and diversifying overseas over the past
few years, driven mainly by the lack of opportunities in Singapore and the attractive
prospects of higher returns overseas. We took a sample size of 22 listed developers
with combined assets of S$143 billion and found that only 44% of their assets are in
Singapore; the rest are in China (28%), the United States (8%), and Australia (4%).
This diversity in exposure has been mainly built over the past three years, after a series
of cooling measures on residential property purchases in Singapore. We estimate that
close to S$8.1 billion of capital was overseas, in contrast to S$7.6 billion invested in
Singapore since 2013. Prior to 2013, most of the capital was vested within Singapore
and the rest of Asia.DBS Asian Insights
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Diagram 2: Developers’ exposure by geography
While we
continue
to expect
Singapore’s
residential prices
to fall marginally
in 2017, most
negatives have
been priced in, in
our view
Source: Companies, DBS Bank
Diagram 3: Top investment destinations for Singapore’s developers (since 2013)
Source: Companies, DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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Australia, London, and Japan have been the main markets of interest in recent years,
with commercial properties (office/hotels) being the main target asset class. The key
reasons are the relatively attractive returns compared to Singapore, boosted by a strong
exchange rate and funding rates that have remained anchored at low levels.
Limited opportunities While we believe that developers will continue to seek higher returns overseas, the yield
compression seen for prime assets over the past few years will mean that their focus
will likely change.
According to property consultant JLL, a Singapore-dollar investor’s foreign-currency
(FX) adjusted total returns will diminish over 2016-2018 and is forecast to yield -3%
to +10%; Shanghai, Sydney, and Melbourne, which offer the highest returns, will
continue to feature regularly on developers’ horizon.
We believe that London will remain one of the key investment markets, despite Brexit
and JLL’s expectations that returns will moderate, mainly due to a weak British pound
in the medium term. Developers are likely to be still keen on the UK if it maintains its
financial-hub status in Europe.
As developers are expected to aim to grow their recurring income base, we believe that core
assets in the commercial space that offer stable cash flow will be key acquisition targets.
DBS’ economist believes that most major currencies will depreciate against the US dollar
over 2017, as the normalisation of monetary policy by the Fed and hawkish policies
from new president Donald Trump might lead to flows from emerging markets back to
the US. Looking ahead, currency volatility will continue to have a big impact on total
returns for investors diversifying into real estate outside their home markets, and it is
important to closely monitor currency movements.
Landbanking Developers looking to replenish their land-bank in Singapore turned up in force in the
government land sales programme (GLS) in 2016 and ventured into the en-bloc market
too. Looking ahead, we believe that another avenue will be outright acquisitions,
especially for listed developers trading at price-to-net-asset-value of 0.7x and certain
mid-cap developers trading below that.
As pressure increases from 2017 onwards from additional buyer stamp duties (ABSD)
on land purchases and Qualifying Charges (QC), we believe developers will ramp up
merger and acquisition (M&A) activity.DBS Asian Insights
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Diagram 4: FX-adjusted returns over time
Strong local partners
Source: JLL, DBS Bank
Diagram 5: Prime yields for commercial real estate
Source: JLL, DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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Diagram 6: Singapore developers’ exposure (% of RNAV)
Developers SG Residential SG Commercial Overseas Total
CapitaLand 9% 25% 66% 100%
City Dev 27% 52% 21% 100%
Ho Bee 15% 56% 29% 100%
Wheelock 30% 39% 32% 100%
UOL Limited 7% 85% 8% 100%
OUE Ltd 9% 56% 35% 100%
Wing Tai 19% 20% 60% 100%
Global Logistics Properties 0% 0% 100% 100%
Source: JLL, DBS Bank
Improved Transactions in Luxury End to Continue
Pick-up in transactions We believe that the luxury end of the market is approaching a near-term bottom,
judging by the higher number of transactions in the core central region. According to
caveats lodged with the Urban Redevelopment Authority, during the first nine months
of 2016, transactions by foreigners (excluding Singapore permanent residents) rose by
close to 12% from the same period a year ago. We note that the increase mainly came
from buyers in China, Malaysia, and Indonesia, up more than 15% y-o-y.
If transaction volumes are sustained, it will imply investors’ confidence in Singapore’s
fundamentals and prospects for long-term capital gains.
Attractive relative According to JLL, Singapore remains an attractive investment destination, especially
pricing as other popular residential investment destinations such as London, Melbourne and
Sydney recently levied additional stamp duties on purchases by foreigners. This has
made Singapore attractive again for international real-estate investors. In addition, we
note that Singapore’s luxury home prices have corrected 11% over the past few years
and the gap between other cities such as Hong Kong, London, and New York – where
prices have continued to increase over the past few years – has widened over time.
Therefore, we believe that Singapore’s luxury homes will be attractive - on a relative
basis across countries with potential capital upside in the medium term – once the
current over-supply situation normalises.DBS Asian Insights
SECTOR BRIEFING 36
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Diagram 7: Transactions in Singapore’s Core Central Region
Source: Companies, DBS Bank
Diagram 8: Transactions in Singapore’s Core Central Region versus the overall market
Source: Companies, DBS BankDBS Asian Insights
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Diagram 9: Increase in home prices across the region
Source: URA, MAS, Christie’s Real Estate, JLL, Knight Frank, DBS Bank
Diagram 10: Average prices of luxury homes
Source: URA, MAS, Christie’s Real Estate, JLL, Knight Frank, DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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No Significant Price Cuts for Developments
Firmer prices going There were close to 22,500 unsold units (both completed and uncompleted) as of 3Q16,
forward of which 24% (or 5,464 units) were located in the Core Central region. The strong sales
seen in recent quarters (especially for recently re-launched completed projects such as
Gramercy Park and OUE Twin Peaks near downtown Orchard) has brought the number
of available units for sale down by 6% quarter-on-quarter, which is one of the sharpest
declines among all regions.
Based on the current run rate for residential transactions, we estimate that total
transactions in 2016 would likely have come in at close to 15,500 (about 8,000 primary
sales deals and 7,500 secondary sales deals), which implies y-o-y growth of close
to 10%. The increase is driven by a marked increase in both primary and secondary
transactions. The former was mainly due to more aggressive marketing and discounts.
The improvement seen in the secondary market came from transactions in the Core
Central region and innovative financing schemes and discounts offered by developers
for some de-licensed projects, which drew a fairly good response from buyers.
We expect the impact of ABSD deadlines to be limited as most projects continue to
enjoy healthy margins. Developers with projects subject to deadlines on the ABSD
remission on residential sites in 2017-2018 have also done well, in our view. According
to our analysis of selected projects with significant unsold inventory at the start of 2016
and which are likely to be under pressure to clear stock due to looming ABSD deadlines
in 2017-2018, most have cleared a substantial portion of their inventory. This is due
to more aggressive marketing as prices dipped slightly by 4-12% (with some staying
steady). This is against investors’ initial worries that developers might have to offer deep
discounts in order to move unsold inventory.
The pick-up in sales momentum, in our view, will likely give developers more optimism
to continue marketing existing projects; they could also step up property launches in
the Central region to capture the improved sentiment in that space. We believe that
developers are likely to pay the ABSD for most projects come 2017 as margins are
expected to remain healthy.DBS Asian Insights
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Diagram 11. Pipeline of unsold private homes (excluding executive condominiums) as of end of Q316
Total Units Core Rest of Outside Remarks
(units) Central Central Central
Region Region Region
(units) (units) (units)
Units Available for sale
(3Q16):
Unsold uncompleted units 20,577 4,711 7,130 8,736
Unsold completed units 1,925 753 543 629
Total unsold units 22,502 5,464 7,673 9,365
% Chg Q-o-Q -3% -6% 1% -5%
Demand :
Primary Sales (9M16) 5,253 444 1,715 3,094
Secondary Sales 6,337 1568 1792 2977
Total Sales 11,590 2,012 3,507 6,071
Ratio (Supply/ annualised 3.2 9.2 3.4 2.3 Ratios for CCR and RCR
primary sales) regions improved while
OCR ratios declined.
Primary Sales (2015) 7,440 407 1,884 5,147
Secondary Sales (2015) 6,677 1,452 1,944 3,281
14,117 1,859 3,828 8,428
Ratio of Supply/Demand 3.0 13.4 4.1 1.8 Ratios for CCR highest
due to low number of
primary sales.
Average Primary Sales 7,030 530 4,400 2,100
(2013-2016)
Average Secondary Sales 7,475 1,572 2,071 3,464
(2013-2016)
14,505 2,102 6,471 5,564
Source: URA, DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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Diagram 12: ABSD payable for selected projects with high unsold inventory in 2017 / 2018
ABSD Region Project Developer Total Unsold Unsold Unsold Unsold Units Land Est
liability Units (Jan’ (%) (Nov’ (%) Sold Cost ABSD
16) 16) in (S$m) (S$m)
2016
ABSD Payable for projects from government land sites
Jan’17 OCR The Trilinq IOI Properties 755 528 70% 303 40% 225 408 52.1
Feb’17 RCR Mon Jervois Singapore Land 140 61 44% 45 32% 16 118.9 15.2
Mar’17 OCR Kingsford Kingsford 512 249 49% 22 4% 227 243.2 31
Hillview Peak
Jun’17 OCR Vue 8 Capital Devt. 463 172 37% 84 18% 88 211 26.9
Residences
Jul’17 CCR Pollen & Bleu Singapore Land 106 94 89% 93 88% 1 113.2 14.4
Jul’17 RCR Sant Ritz Santarli Corp 214 24 11% 10 5% 14 114.8 14.7
Sep’17 CCR The Siena Far East Org. 54 22 41% 12 22% 10 45.8 5.8
Sep’17 RCR The Crest Wing Tai, 469 366 78% 325 69% 41 516 65.9
Metro, UE
Oct’17 OCR The Glades Keppel Land 726 343 47% 134 18% 209 434.6 55.5
Dec’17 RCR Alex Singapore Land 429 173 40% 152 35% 21 332.7 41.6
Residences
Jan’18 OCR The Panorama Wheelock 698 126 18% 28 4% 98 550 70.2
Apr’18 OCR Riverbank @ UOL Group 555 188 34% 64 12% 124 262.1 50.2
Fernvale
Jun’18 RCR Highline Keppel Land 500 320 64% 215 43% 105 550.3 105.3
Residences
Apr’18 OCR The Santorini MCC Land 597 390 65% 328 55% 62 289.7 55.5
Sep’18 CCR Sophia Hills Hoi Hup 493 437 89% 346 70% 91 442.3 84.7
ABSD Payable for projects from private land sites
Mar’17 CCR Meyer Melodia Cang Properties 16 15 94% 15 94% 0 9.4 1.2
Mar’17 CCR Robin Suites Robin25 Pte Ltd 92 26 28% 6 7% 20 54 6.8
Jan’17 RCR Ascent @ 456 Quest Homes 28 13 46% 10 36% 3 24 3.1
Apr’17 OCR The Bently Goodland 48 15 31% 5 10% 10 27 3.4
Residences Group
Jun’17 RCR Neem Tree Aylesbury Pte 84 67 80% 64 76% 3 46 5.9
Ltd
Sep’17 OCR The Creek @ Chiu Teng 260 144 55% 107 41% 37 190 24.5
Bukit Group
Sep’17 OCR Rezi3Two Tee, KSH and 65 22 34% 7 11% 15 22.6 2.8
Heeton
Oct’17 OCR Lotus Ville JVA Venture 11 8 72% 7 64% 1 18 2.3
Nov’17 CCR The Rise @ Hao Yuan 120 51 43% 25 21% 26 130 16.6
Oxley
Source: URA, DBS BankDBS Asian Insights
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Diagram 13: Impact analysis of ABSD payment on margins
Project Est. Est. Selling Selling % Chg Average Margins Margins
Breakeven Breakeven Prices prices (S$’psf) (q/o (with
(S$’psf) with ABSD < 2016 in 2016 ABSD) ABSD)
(S$’psf) (S$’psf) (S$’psf) (%) (%)
ABSD Payable for projects from government land sites
The Trilinq 920 990 1,405 1,404 0% 1,404 53% 42%
Mon Jervois 1,265 1,400 1,981 1,832 -8% 1,907 51% 36%
Kingsford 1,010 1,090 1,367 1,286 -6% 1,326 31% 22%
Hillview Peak
Vue 8 780 830 983 992 1% 988 27% 19%
Residences
Pollen & Bleu 1,450 1,575 1,922 1,801 -6% 1,862 28% 18%
Sant Ritz 1,000 1,080 1,419 1,358 -4% 1,388 39% 29%
The Siena 1,500 1,650 2,067 1,826 -12% 1,947 30% 18%
The Crest 1,350 1,470 1,698 1,718 1% 1,708 27% 16%
The Glades 1,530 1,675 1,454 1,412 -3% 1,433 -6% -14%
Alex 1,350 1,500 1,705 1,943 14% 1,824 35% 22%
Residences
The 1,180 1,300 1,243 1,220 -2% 1,232 4% -5%
Panorama
Riverbank @ 850 940 976 992 2% 984 16% 5%
Fernvale
Highline 1,600 1,800 1,879 1,735 -8% 1,807 13% 0%
Residences
The Santorini 950 1,035 1,131 1,082 -4% 1,106 16% 7%
Sophia Hills 1,450 1,650 1,995 1,916 -4% 1,955 35% 19%
ABSD Payable for projects from private land sites
Mayer 510 530 2,226 - 0% 1,113 >100% >100%
Melodia
Robin Suites 1,450 1,600 2,496 2,276 -9% 2,386 65% 49%
Ascent @ 456 1,400 1,580 1,506 1,527 1% 1,516 8% -4%
The Bently 1,000 1,050 1,408 1,229 -13% 1,319 32% 26%
Residences
Neem Tree 1,180 1,285 1,616 1,756 9% 1,686 43% 31%
The Creek @ 1,180 1,400 1,589 1,656 4% 1,622 37% 16%
Bukit
Rezi3Two 1,000 1,050 1,507 1,533 2% 1,520 52% 45%
Lotus Ville 775 830 803 754 -6% 779 0% -6%
The Rise @ 1,525 1,685 2,335 2,283 -2% 2,309 51% 37%
Oxley
Source: URA, DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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Land-banking Opportunities in Singapore
Turning to en-bloc sites Following the dearth of land supply since the property market peaked in 2013 and the
or M&A fact that developers have pre-sold most of their inventory on hand, the government’s
residential land tenders have remained competitive, driving bids high. Looking ahead, as
the government continues to maintain a low supply in the land tenders in the first half of
2017, we believe that developers could turn towards the en-bloc market or even look to
M&A to continue land-banking and to seek growth.
Apart from government land sales, developers have turned to opportunities in the private
market as evidenced by the pick-up in en-bloc transactions in 2016.
Smaller developers, some of which on average trade at a 50% discount to book value,
could be attractive acquisition or privatisation candidates.
Limited government land sales (GLS) to result in sticky
land-bid prices
Lowest level since crisis Since the property market peaked in 2013, the government has been moderating land
supply. Total gross floor area of government residential land sales tendered out in 2016
reached a trough of approximately 4.4 million square feet (sq ft), 75% below the peak
in 2012.
Unsold inventory at the With the government having moderated land supply for a few years now, unsold inventory
lowest since 2001 of residential properties has reached its lowest since 2001. As at 3Q16, unsold inventory
had almost halved since its peak in 2011.
Land prices have While land prices from the government land tenders have moderated marginally in 2014-
remained sticky 2015, we saw an increase in the number of bidders at each tender with prices for selected
sites near the central region achieving new record highs, due to the limited number of sites
available for tender.
Increasingly more The spreads between the winning bid and the second and median bids have also narrowed
competitive from 15% in 2013 (peak of 62% in 2009) to 3% in 2016. The number of bids has increased
to an average of 12 in 2016, above the historical average of eight.
Developers could
turn towards the
en-bloc market
or even M&A to
continue land-
bankingDBS Asian Insights
SECTOR BRIEFING 36
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Diagram 14: Land supply from the government
Diagram 15: Land prices
Diagram 16: Winning margins and average range of bids
Sources: Realis, DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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Diagram 17: Average number of bidders
Sources: Realis, DBS Bank
Diagram 18: GLS sites awarded in 2016
Date of Location Type of Lease No. Name of Developer Successful S$ psf Units
Award Development (yrs) of Successful Tender Price per plot
Bids Bidder (S$m) ratio
6-Dec-16 Margaret Residential 99 14 MCL Land SG Listed 238.4 997.8 275
(tender Drive (Regency) Pte Ltd Source: Realis, DBS Bank
closed)
1-Oct-16 Fernvale Residential 99 14 Sing Development SG Listed 287.1 517.2 575
Road (Pte) Ltd and Wee
Hur Development
Pte Ltd
5-Sep-16 Anchorvale Executive 99 16 Hoi Hup Realty Pte Foreign 240.9 355.2 635
Lane Condominium Ltd and Sunway
Developments Pte
Ltd
1-Jul-16 Martin Place Residential 99 13 First Bedok Land SG Listed 595.1 1,239.4 450
Pte Ltd (Guocoland)
30-May-16 Bukit Commercial & 99 11 Qingjian Realty Foreign 301.2 634.8 425
Batok West Residential (BBR) Pte Ltd. And
Avenue 6 Qingjian Realty
(BBC) Pte Ltd
13-Apr-16 Jalan Kandis Residential 99 9 Dillenia Land Pte Foreign 51.1 481.2 110
Ltd
29-Feb-16 Yio Chu Executive 99 10 Hoi Hup Realty Foreign 183.8 331.1 520
Kang Road Condominium Pte Ltd
26-Feb-16 New Upper Residential 99 8 CEL Residential SG Listed 419.4 760.8 570
Changi Road Development Pte
(Parcel B) Ltd
18-Jan-16 Siglap Road Residential 99 8 FCL Topaz Pte Ltd, SG Listed 624.2 858.3 800
Sekisui House Ltd
and KH Capital
Pte Ltd
Total 2,702.8 4,085
Source: Companies, DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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Diagram 19: 1H17 government land sales programme
Location Site area Proposed Est. No. of Est, No. Estimated Estimated Sales
(ha) GPR Housing of hotel commercial launch agent
Units rooms space date
(sqm)
CONFIRMED LIST 2H15
Residential Sites
1 Toh Tuck Road 1.87 1.4 325 - - Feb-17 URA
2 Tampines Avenue 10 2.17 2.8 715 - - Mar-17 URA
(Parcel C)
3 Lorong 1 Realty Park 1.31 Landed 50 - - Apr-17 URA
4 Serangoon North 1.72 2.5 505 - - May-17 URA
Avenue 1
5 Woodleigh Lane 1.96 3 735 - - May-17 URA
Total (Confirmed List) 2,330 - -
RESERVE LIST
Residential sites
1 Stirling Road 2.11 4.2 1110 - - Available URA
2 Bartley Road / Jalan 0.47 2.1 115 - - Available URA
Bunga Rampai
3 Sumang Walk (EC) 2.71 3 775 - - Available HDB
4 Yishun Avenue 9 2.17 2.8 715 - - May-17 URA
5 Owen Road 1.38 3.5 605 - - Jun-17 URA
6 Jiak Kim Street 1.33 3.8 515 - 1,500 Jun-17 URA
7 Fourth Avenue 2.02 1.8 455 - - Jun-17 URA
Commercial & Residential Sites
9 Holland Road 2.3 2.6 570 - 13,500 Available URA
Commercial Sites
10 Beach Road 2.1 4.2 - - 88,200 Available URA
11 Woodlands Square 2.24 3.5 260 - 60,030 Available URA
Total (Reserve List) 5,135 - 158,080
Total (Confirmed 7,465 - 158,080
List and Reserve
List)
Source: URA, DBS BankDBS Asian Insights
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More En-bloc Transactions in 2017
During 2005-2007, when there was a shortage of government land supply, we saw a pick-
up in en-bloc transactions. Following the implementation of property-cooling measures in
2011, the number of en-bloc transactions dwindled to zero in 2014. In 2015, only one
successful transaction – the sale of Thong Sia Building – was recorded.
Nevertheless, we saw a pick-up in en-bloc transactions in 2016 with Harbour View Gardens
being sold in August 2016 at an average price of S$1,300 psf, five en-bloc deals announced,
and more news on owners engaging property consultants (such as JLL and CBRE) to set up
collective sales committees. The five en-bloc deals announced (excluding en-bloc sales for
asset-recycling or specifically to be exempted from ABSD or QC charges) were:
1. Shunfu Ville, Bishan which was the first en-bloc sale of a privatised former Housing and
Urban Development Company (HUDC) estate in nine years at S$639 million (S$557 psf ppr),
2. Raintree Gardens, Potong Pasir, the second en-bloc sale of a privatised former HUDC
estate at S$334 million (S$593psf ppr) to the UOL-UIC joint venture,
3. No. 3 Cuscaden Walk, Orchard at S$103.8 million (S$1,826 psf ppr) to SL Capital, a
consortium led by Sustained Land,
4. No. 120 Grange Road, Orchard at S$48.5 million (S$1,841 psf ppr) to Roxy-Pacific
Holdings, and
5. No. 8 Hullet Road, Orchard at S$38.2 million (S$2,073 psf ppr) to a consortium led by
Patrick Kho of Lian Huat Group. According to news reports, properties for sale include
two apartments at The Claymore, Lakeside Towers in Jurong, Villa D’Este on Dalvey
Road, and Cairnhill Mansion on Orchard Road.
Despite the tighter rules on en-bloc sales and a more tedious process in completing an en-
bloc transaction, developers are now willing to undertake these deals, implying that they
are i) hungry for land, and ii) taking a more positive outlook in the medium term.
Diagram 20: Land supply from the government
Source: URA, DBS BankDBS Asian Insights
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Diagram 21: Land prices
Source: URA, DBS Bank
Diagram 22: Trends in en-bloc sales
Source: URA, DBS BankDBS Asian Insights
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Diagram 23: Total land transactions
Source: URA, DBS Bank
Merger and Acquisition Activity Could Pick up
With the recent proposed privatisation of various property-related companies and news
reports of potential takeovers of United Engineers (UE) and Global Logistic Properties (GLP),
we believe that some of the smaller-cap developers which are trading at deep discounts to
net asset value could look attractive for potential M&A as an alternative to acquire assets/land
banking. Here is the summary of each of the small-cap developers. They are trading at an
average discount to net asset value of 29%, with most trading at a range of 40-93% discount.
Companies that are in deep discounts with attractive assets include Bukit Sembawang (93%
discount), Wing Tai (60%), Hiap Hoe (51%), and Ho Bee (50%).DBS Asian Insights
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Diagram 24: Sample list of small-cap developers that could head down the M&A route
Bukit Sembawang Wing Tai Hiap Hoe
Bloomberg / Reuters BS SP / BSES.SI WINGT SP / WTHS.SI HIAP SP / HIAP.SI
Market Cap (S$m) 1,177 1,298 335
Shareholding Lee Family 44% Cheng Family 50% Teo Family 70%
Structure
Aberdeen 11% Others 2% Others 1%
Asia Fountain Inv 5% Free Float 48% Free float 29%
(Guoco Grp)
Free float 39%
Disc / (Prem) to NAV 93% 60% 51%
Debt / Equity no debt 0.4 0.7
Net debt / Equity no debt 0.1 0.6
Cash balance (S$'m) 401 966 23
Cash % of Market 34% 74% 7%
Cap
Assets by business Development 99.6% Development 57% Investment 45%
units properties properties properties
Investment properties 0.4% Investment 39% Hotel 11%
properties
Retail 2% Development 8%
properties
Others 2% Construction 4%
Leisure 0%
Others 31%
Assets by country n/a Singapore 47% Singapore 82%
Hong Kong 29% Australia 18%
China 11%
Malaysia 13%
Key assets Paterson Collection, Orchard, The Crest, Singapore - Signature At Lewis, Singapore -
Singapore - Residential Residential Residential
St Thomas Walk, River Valley, Le Nouvel KLCC, Malaysia - HH @ Kallang, Singapore -
Singapore - Residential Residential Industrial
Luxus Hill, Seletar, Singapore - Winsland House, Singapore - Zhongshan Park Integrated,
Landed residential Comm Novena, Singapore - Mixed
Watercove, Sembawang, Singapore Development in Suzhou
- Landed residential Industrial Park - Comm
Lanson Place, Shanghai -
Hospitality
Source: DBS BankDBS Asian Insights
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Diagram 24: Sample list of mid-cap developers that could head down the M&A route (continued)
Ho Bee Roxy Wheelock
Bloomberg / Reuters HOBEE SP / HBEE.SI ROXY SP / RXYP.SI WP SP / WPSL.SI
Market Cap (S$m) 1,477 501 1,789
Shareholding Chua Family 76% Teo Family 72% Wheelock and 76%
Structure Company Limited
Others 1% Others 6% Aberdeen 6%
Free float 23% Free float 22% Free Float 18%
Disc / (Prem) to NAV 50% 45% 40%
Debt / Equity 0.5 1.9 0.0
Net debt / Equity 0.5 1.2 (0.4)
Cash balance (S$'m) 77 327 1,319
Cash % of Market Cap 5% 65% 74%
Assets by business Commercial 63% Development 57% Development 58%
units properties properties
Residential 35% Hotel 11% Investment 35%
properties
Industrial 1% Investment 16% Investments 7%
properties
Others 17%
Assets by country Singapore 55% Singapore 42% Singapore 80%
The UK 29% Australia 36% Other 20%
China 12% Japan 8%
Australia 4% Thailand 4%
Malaysia 4%
Hong Kong 5%
Indonesia 1%
Key assets Turquoise, Seascape & Cape Royale, Hotel properties in Singapore, Ardmore Three, Orchard,
Sentosa Cove, Singapore Japan, Australia, Thailand, Singapore - Residential
and Maldives
Residential projects in Shanghai, Sunnyvale Residences, Scotts Square, Orchard,
Tangshan, Zhuhai Singapore - Residential Singapore - Residential
6 commercial buildings in London Trilive, Singapore - Resi / Retail Fuyang project, Hangzhou,
China
The Metropolis, Buona Vista, New World Towers, South Wheelock Place, Singapore-
Singapore - Comm / Retail Brisbane, Australia - Comm / Retail
Residential
HB Centre 1 & 2, Singapore - Ind Land in Singapore, Australia,
Indonesia
Source: DBS BankDBS Asian Insights
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Diagram 24: Sample list of mid-cap developers that could head down the M&A route (continued)
Metro UE Aspial Oxley
Bloomberg / Reuters METRO SP / MTHL.SI UEM SP / UTES.SI ASP SP / ASPA.SI OHL SP / OXHL.SI
Market Cap (S$'m) 844 1,676 525 1,282
Shareholding Ong Family 36% Great Eastern 13% Koh Family 84% Ching Chiat 43%
Structure Kwong
Ngee Ann 10% OCBC 10% Others 6% Low See Ching 29%
Dev Pte Ltd (Liu Shijin)
Others 6% Lee Foundation 9% Free float 11% Tee Wee 12%
Sien (Zheng
Weixian)
Free float 49% WBL Corp 3% Others 15%
Free float 65% Free float 1%
Disc / (Prem) to NAV 37% 15% -60% -63%
Debt / Equity 0.0 0.6 4.2 3.1
Net debt / Equity (0.3) 0.3 3.9 2.6
Cash balance (S$'m) 418 671 72 367
Cash % of Market Cap 50% 40% 14% 29%
Assets by business Property 96% Development 22% Real estate 44% Development 68%
units properties properties
Retail 4% Investment 47% Financial 10% Hotel 13%
properties service
Technology & 17% Jewellery 5% Investment 7%
Manufacturing properties
Corporate 14% Others 41% Corporate 12%
Services &
Other Assets
Assets by country China 79% Singapore 85% Singapore 99.9% Singapore 97%
ASEAN 15% China 10% Malaysia 0.1% Malaysia 2%
Others 7% USA 1% The UK 1%
Malaysia 1% Japan 0%
Taiwan 1% Cambodia 0%
ASEAN (ex 0% Others 1%
Singapore and
Malaysia)
Hong Kong 0%
Rest of Asia 0%
Others 2%
Source: DBS BankDBS Asian Insights
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Diagram 24: Sample list of mid-cap developers that could head down the M&A route (continued)
Metro UE Aspial Oxley
Key assets Nanchang Fashion UE Bizhub City, Kensington Square, The Flow, East Coast,
Mark, Jiangxi, China Singapore - Mixed Singapore - Retail / Singapore - Comm
- Mixed Resi
The Crest at Prince UE Bizhub West, City Gate, Singapore - The Rise@Oxley, Oxley Rise
Charles Crescent, Singapore - Ind / Retail / Resi Rd, Singapore - Residences
Singapore - Comm / Retail
Residential
Sheffield Digital Mixed Development Nova City, Cairns, Floraville / Floraview /
Campus, Sheffield, One North, Singapore - Australia - Mixed Floravista, Ang Mo Kio,
UK - Comm Mixed Singapore - Mixed
Middlewood Locks, Land in Brisbane and Space@Tampines,
Manchester, UK - Penang Singapore - Industrial
Residential
Metro Tower / City, Novotel & Ibis on
Shanghai - Comm / Stevens, Singapore -
Retail Hospitality
GIE Tower, Development properties
Guangzhou, China - in Cambodia, Malaysia,
Comm Myanmar, etc
Source: DBS Bank
Based on selected privatisation transactions between 2010 and the latest practicable date
involving property developers listed on the SGX (list may not be exhaustive), the deals were
transacted at an average price-to-net-asset-value multiple of 1.0x and price-to-revalued-
net-asset-valuation of 0.8x as shown in the table below. However, we note that there may
be differences in terms of size, market capitalisation, financials, and portfolios that could
change the potential valuations for M&A.DBS Asian Insights
SECTOR BRIEFING 36
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Diagram 25: Historical transactions involving listed property developers (since 2010)
Announcement Target Acquirer Final Deal Premium/ P/NAV P/RNAV
Date Company Offer Value Discount
Price S$’m 1-mth VWAP
Aug-2016 Sim Lian Coronation 1.08 216 16.8% 0.9x n.a.
3G
Jan-2015 Keppel Land Keppel Corp 4.38 2,749 25.0% 0.88x 0.66x
Apr-2014 Hotel Wheelock 4.05 200 33.8% 1.32x 0.79x
Properties
Limited
Apr-2014 CapitaMalls CapitaLand 2.35 3,025 35.8% 1.26x 0.89x
Asia Limited
Feb-2014 Singapore Land United 9.40 650 16.9% 0.72x 0.67x
Limited Industrial
Corporation
Limited
Dec-2012 SC Global MYK 1.80 318 57.2% 1.15x 0.8x
Developments Holdings Pte
Limited Ltd
May-2012 Wing Tai Ascend 1.39 1,104 14.3% 0.55x 0.62x
Capital
Limited
May-2011 Allgreen Brookevale 1.60 1,060 40.6% 0.99x 0.81x
Limited Investment
Pte Ltd
Sep-2010 Soilbuild Dolphin 0.80 113 15.6% 1.26x 1.07x
Limited Acquisitions
Aug-2010 MCL Hong 2.45 189 27.3% 0.96x 0.75x
Kong Land
Holdings
Limited
Min 14.3% 0.62x 0.62x
Mean 28.3% 0.78x 1.0x
Median 26.1% 0.79x 1.0x
Max 57.2% 1.07x 1.32x
Source: DBS Bank
Will Developers Need to Deleverage?
Average indebtedness Property developers have generally been conservative in their approach towards capital
has been stable management and, over the past few years, kept net gearing in the range of 0.4-0.6x.
Tracking the average indebtedness of developers over time, we found that mid-sizedDBS Asian Insights
SECTOR BRIEFING 36
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Most mid-sized developers (defined as those with market capitalisation of up to S$2 billion) have generally
developers could taken on more debt in recent years and thus have an average gearing of c.0.8x in the last
four years, higher than the sector’s average of c.0.7x over the same period. On average,
be crowded out over the same period, large-cap developers have an average net gearing ratio of about 0.5x.
by their larger
competitors Developers that stand out in terms of gearing as of the latest reported quarter are the likes
of Guocoland (large developer) at 1.2x – which has the highest gearing among the group –
and in the mid-sized developer space – Oxley, Tee Land and Roxy-Pacific which all have net
gearing in excess of 1.0x (Diagram 26). Chip Eng Seng and Tuan Sing also have high net
gearing of above 0.9x.
Developers to 2017 will turn out to be a tough year for developers to deploy capital. Firstly, we expect the
deleverage land-banking climate to remain competitive in Singapore, given limited land sites available for
tender from the government. This means that most mid-sized developers could be crowded
out by their larger competitors or foreign developers. Secondly, increased currency volatility
is expected to be a drag on returns when they deploy more capital overseas. As such, given
limited avenues to deploy capital and fairly strong balance sheets, we believe that they could
choose to deleverage their balance sheet or pay higher dividends going forward.
The spike at the end of 2016 in swap-offer rates (SOR) could imply higher refinancing costs
going forward. As such, faced with a slowing top-line growth and increasing prospects
of higher interest obligations, property developers would be better served if they utilised
proceeds that will be recognised from subsequent years’ pre-sales to pare down debt
obligations when they come due in 2017-2018.
From our interest-rate analysis, we estimate that developers’ Profit After Tax and Minority
Interests (PATMI) would take a hit of 4-40% if interest rates rose by 1%.
Diagram 26: Gearing of developers
Source: Bloomberg Finance L.P., DBS BankDBS Asian Insights
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Diagram 27: Net gearing of selected mid-cap developers (Q316)
Source: Bloomberg Finance L.P., DBS Bank
Bond issuance has With strong investor demand for yields in recent years as interest rates remain low, we have
increased seen an increase in new bond issuance in Singapore. In the real estate space, we have seen
close to S$34 billion of new bonds over the past five years, which is more than 20% of the
total amount of new bond issuances over the preceding five years.
In the real estate sector, bond issuances peaked in 2011, and reached new highs again in
2012 and 2015. In 2015, bond issuances by real estate firms totalled S$8.7 billion, with
mid-sized developers increasingly tapping the bond market. A total of S$3.5 billion worth
of bonds will be due in 2017.
The average cost of funds has also fallen over time, and has stabilised at about 3% since
2008.
Continued access to funding is a key enabler of a healthy real estate development and
Real estate investment market. However, recent bond defaults in the oil & gas space has turned
firms need to investors off bonds. In addition, the market for future issues appears to be largely shut for
refinance about now. If the risk-off sentiment persists, it might become a headwind for real estate firms that
S$4 billion of need to refinance about S$4 billion of bonds – out of the market’s total of S$6.3 billion –
due in 2017-2018.
bonds – out of
the market’s total We note that among the bonds due in 2017, developers like Guocoland and OUE will need
of S$6.3 billion to refinance expiring bonds. Developers such as OUE and Heeton’s existing cash balance
– due in 2017- and receivables may not be sufficient for repayment of bonds. Additional financing may
2018 be required.DBS Asian Insights
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Diagram 28: Bond issuance by developers
Source: Bloomberg Finance L.P., DBS Bank
Diagram 29: Profile of bond expiry
Source: Bloomberg Finance L.P., DBS BankDBS Asian Insights
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Diagram 30. Selected property developers’ outstanding bonds, 2017-2018
Issuer Maturity Amount Outstanding (S$'m)
SingHaiyi Group Ltd Jan-17 100
Fragrance Group Ltd Jan-17 85
OUE Ltd Feb-17 300
City Developments Ltd Feb-17 250
GLL IHT Pte Ltd (Guocoland) Feb-17 160
UOL Group Ltd May-17 75
Oxley Holdings Ltd May-17 150
Heeton Holdings Ltd Jun-17 60
CapitaLand Treasury Ltd Jul-17 50
GLL IHT Pte Ltd (Guocoland) Aug-17 170
Keppel Land Ltd Aug-17 100
GLL IHT Pte Ltd (Guocoland) Sep-17 105
Chip Eng Seng Corp Ltd Oct-17 150
TEE Land Ltd Oct-17 30
Hongkong Land Dec-17 50
City Developments Ltd Mar-18 100
Perennial Treasury Pte Ltd (Perennial) Mar-18 100
UOL Treasury Services Pte Ltd (UOL) Apr-18 175
Global Logistic Properties Ltd May-18 67
Centurion Corp Ltd Jul-18 65
Roxy-Pacific Holdings Ltd Jul-18 60
GLL IHT Pte Ltd (Guocoland) Sep-18 75
Citydev Nahdah Pte Ltd Sep-18 50
City Developments Ltd Sep-18 50
Perennial Real Estate Holdings Ltd Oct-18 300
Source: Bloomberg Finance L.P., DBS BankDBS Asian Insights
SECTOR BRIEFING 36
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Singapore’s REITs: Déjà Vu
A
t the end of 2015 – after the first rate hike by the Fed in December 2015 – the
market was pricing in three rate hikes. This resulted in a correction in S-REITs in
January 2016. However, as the year progressed, the impact of negative interest
rates in Europe and Japan, further correction in oil prices, disappointing nonfarm
payroll data in May, and uncertainty caused by Brexit caused expectations for rate hikes to be
dialed back significantly.
Consequently, the S-REIT Index (excluding dividends) rallied by 11% by early September,
outperforming the 0.4% rise in the Straits Times Index and 2% fall in the property developers
index. But this reversed on the improving US economy and the victory of Donald Trump in the
US presidential election on November 8; the S-REIT index fell 8%, more than the 0.4% and
0.3% drop in the Straits Times Index and the developers’ index.
S-REITs’ performance Going into 2017, consensus expectations are for three rate hikes; DBS’ economists are more
to be capped hawkish, forecasting the Fed to increase the Fed Funds rate by 25 basis points once every
quarter, with the US ten-year bond yield rising to 3.25% (versus consensus forecasts of 2.5%).
The Singapore ten-year bond yield is also expected to increase in tandem to 3.05%. Should our
DBS house view come to fruition, we believe the performance of S-REITs will likely be capped.
Deteriorating rental Revenues across the office, retail, industrial, and hospitality sectors were under pressure in
outlook 2016 due to a combination of sluggish demand as well as increase in completed projects and
anticipated supply. Demand for the more cyclical sectors – office, hotel, and industrial property
– was also negatively impacted by the uncertain economic environment. Meanwhile, the retail
sector was affected by Singaporeans spending their disposable income overseas and shopping
online. Going into 2017, we believe these negative trends are likely to continue, resulting in a
modest 1.1% growth in DPU for the sector.
Current forward yields offer some buffer, with yield spread at average levels, assuming a
normalised 10-year yield of 3%. While S-REITs are likely to face headwinds in the form of falling
rents and rising interest rates, we believe the correction in 2016 has provided some downside
buffer. The current FY17F yield spread to a normalised 3% bond yield stands at 4%, which is
slightly above the historical average spread of 3.8% and close to the 4.1% average since 2010.
Impact on DPU While investors are rightfully concerned about the impact of an increase in interest rates on
DPU, based on our analysis, the full impact will only be felt over the course of the next two
to three years. This is because S-REITs in general have hedged 75-85% of their debt into fixed
rates and have only 9%, 21%, and 20% of total debt up for refinancing over 2017, 2018,DBS Asian Insights
SECTOR BRIEFING 36
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and 2019 respectively. We estimate that a 1% rise in interest rates will have a 2.9% and 4.9%
impact on distributions in 2017 and 2018, respectively.
In terms of sectors, our preference is for office REITs despite the expected decline in office rents,
given that the sector trades at 20% discount to book value and 10-30% discount to recent market
transactions. In addition, we think the sector remains under-owned relative to other sectors.
Our second preference is the retail sector for its resilient income stream (i.e. exposure to
suburban shopping malls) and the fact that it is trading at close to 1x price-to-book-value versus
the sector’s typically 10-20% premium to book value. The industrial sector’s ranking is mainly
attributed to our positive view on the larger REITs, such as Ascendas REIT, which offer strong
balance sheets, decent yields, and growth potential.
While we see long-term value in the hospitality sector, given that the sectors trades at 20-40%
discount to book, we believe there is limited re-rating catalyst at least for the first half of 2017
as RevPAR is expected to remain under pressure. However, we recommend that investors look
for opportunities to re-enter in the second half of 2017 on the back of a potential recovery in
2018 as the oversupply situation in Singapore normalises.
Key Issues in 2017
The full impact With a sense of déjà vu, as we approach 2017, we are faced with the same issues confronting
investors at the start of 2016 and 2015. These include risk of rising interest rates, slowing
of an increase in growth, higher cost of capital potentially constraining the ability to raise capital to fund growth
interest rates on plans, and heightened risk of write-downs of property values given falling rents.
DPU will only be
felt over the With the economic outlook now softer than at the start of 2015 and 2016, we believe that
next two to S-REITs with stronger growth will command an increasing premium. In addition, S-REITs which
three years were resilient in the past and trade at a premium but are now only able to offer flattish DPU
growth might be vulnerable, given rising risk of earnings disappointment. Key themes in 2017
are as follows:
Impact of an increase in interest rates on share price,
distributions
We believe investors’ attention has been focused on the pace of interest-rate hikes. So far,
consensus is expecting three rate hikes in 2017, with the US ten-year bond yield forecast to rise
to 2.5-2.6%. With share prices for S-REITs having already corrected in anticipation of this, we
believe S-REITs will likely deliver steady returns. In contrast, the more hawkish forecasts by DBS’s
economists, who anticipate four rate hikes (25 basis points once a quarter), would take the
Fed funds rate to 1.5% by end-2017, the US ten-year bond yield to 3.25%, and the Singapore
ten-year bond yield to 3.05%. Under our house view, the overall performance of S-REITs will
likely be capped.DBS Asian Insights
SECTOR BRIEFING 36
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Trump’s policies While the market remains focused on rate hikes, there is a possibility that 2016 could repeat
itself, with the Fed holding off on hikes. This could happen if the European Central Bank (ECB)
and Bank of Japan (BOJ) decide to push interest rates further into negative territory and if the
markets – and the Fed – get nervous about the potential breakup of the euro on the back of
(possible) victories by nationalist parties in several European elections . Furthermore, the policies
actually implemented by Trump may not be as inflationary as first thought and/or concerns
over the policies’ impact on global trade/economies may weigh more on long-term bond yields.
Potential return of The Singapore dollar strengthened against the US dollar between 2009 and 2013, when the
capital to the US Fed implemented three rounds of quantitative easing. During this period, the carry trade was
prevalent with US dollar-based investors taking advantage of the stronger Singapore dollar
by taking positions in yield instruments including S-REITs. This resulted in the FSTREI Index
rallying about 44% to its peak in May 2013. However, as the quantitative easing programme
ended and interest rates started rising from December 2015, the FSTREI Index has become
more volatile, moving in sync with changes in interest rate expectations and movements in the
greenback. Going forward, should US interest rates continue on an aggressive path upwards –
in line with DBS’s economists’ view – capital from Asia would likely return to the US, presenting
a headwind to the performance of S-REITs.
Diagram 31: DBS’s forecast of interest rates
Current 1Q17F 2Q17F 3Q17F 4Q17F
(8 Dec'16)
US 10-Year Bond 2.35% 2.65% 2.85% 3.05% 3.25%
US 2-Year Bond 1.10% 1.50% 1.70% 1.90% 2.10%
US Yield Curve 1.25% 1.15% 1.15% 1.15% 1.15%
(10Y-2Y)
SG 10-Year Bond 2.34% 2.65% 2.75% 2.85% 3.05%
SG 2-Year Bond 1.17% 1.50% 1.65% 1.80% 1.95%
SG Yield Curve 1.17% 1.15% 1.10% 1.05% 1.10%
Source: Bloomberg Finance L.P., DBS Bank
The policies actually implemented by Trump may not be
as inflationary as first thoughtDBS Asian Insights
SECTOR BRIEFING 36
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Diagram 32: Singapore REITs versus currency
Source: Bloomberg Finance L.P., DBS Bank
The current FY17F yield spread to the spot ten-year bond yield stands at 4.7%, which is above
the historical average spread of 4.1% since 2010. However, assuming a normalised 3.05%
bond yield, the yield spread will drop to 4%, which will be in line with its historical mean.
This implies that current share prices have priced in the possibility that rates will inch back to
normalised levels.
Growth to compress Assuming the long bond yield spikes to 3.05% by end-2017, share prices of S-REITs in general
may be volatile. However, we believe S-REITs with clear visible growth drivers have the potential
to experience a compression in yield spread, with absolute yields stable or even compressing.
This would be similar to the last period when interest rates rose. Using Capital Mall Trust (CMT)
as an example, from 2004-2007, CMT’s yield spread fell from over 4% to 0.4% in mid-2007,
as the Fed raised the Fed Funds Rate from 1% to a peak of 5.25%, and CMT generated annual
DPU growth in excess of 7%.DBS Asian Insights
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Diagram 33: Case study: CMT’s experience as interest rates rose
Source: Bloomberg Finance L.P., Thomson Reuters, DBS Bank
Diagram 34: Forward S-REIT yield spread
Source: Bloomberg Finance L.P., DBS BankDBS Asian Insights
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Diagram 35. Historical S-REIT yield and S-REIT yield spread (2005-current)
Period Years 10-Year S-REIT S-REIT Comments
bond (%) Yields (%) Yield
Spreads
(%)
“High Growth” 2005 2.9% 4.8% 2.1% 2005-2007 was a period of high
growth for the S-REITs when average
2006 3.4% 5.0% 1.6%
distribution growth was about 13%. Key
2007 2.9% 4.1% 1.2% catalysts were acquisitions
“Aberration in 2008 2.8% 7.3% 4.5% Yield spread expanded to >5.1% due to
valuations due the financial crisis
2009 2.3% 9.6% 7.3%
to the GFC”
“Liquidity 2010 2.4% 6.3% 3.9% After the global financial crisis , the
driven sector saw yield compression in 2012-
2011 2.2% 6.4% 4.2%
recovery” 2013 before the Fed hinted of rate hikes
2012 1.5% 6.5% 5.0% in mid-2013
2013 2.0% 5.8% 3.8%
2014 2.4% 6.2% 3.8%
2015 2.4% 6.3% 3.9%
Periods
2005-current 2.5% 6.2% 3.8%
2006-2008 3.0% 5.4% 2.4%
2010-current 2.1% 6.3% 4.1%
Forward
Current (FY17F) 2.3% 7.0 % 4.7%
Normalised (FY17F) 3.0% 7.0% 4.0%
Source: Bloomberg Finance L.P. Finance L.P, DBS Bank
Impact of interest rates on distribution
Breathing room While interest rates are anticipated to rise in 2017, the majority of S-REITs have hedged 75-
85% of their borrowings – with a weighted average debt maturity of 2-3 years. For FY17,
about 9% of debt on average is due to be refinanced, thus the full impact of higher costs
of borrowings will not be felt in 2017 but over the subsequent few years. In addition, the
impact of a rise in interest rates is likely to be felt by the REITs which predominantly borrow
in Singapore dollars. In contrast, REITs with exposure to European, Japanese, and Australia
assets with commensurate debt in euros, Japanese yen, and Australian dollars, may even reportDBS Asian Insights
SECTOR BRIEFING 36
40
declining – or a slower increase – in borrowing costs as they refinance their debt. This is because
interest rates in Europe, Japan, and Australia are now lower than when the REITS first borrowed
in the respective local currencies.
Assuming a 1% lift in the cost of borrowing above our current estimates (we have already
assumed up to a 25-basis-point increase in the cost of debt compared to FY16) and that the
impact only occurs when the various S-REITs refinance 9% and 21% of all loans outstanding
in 2017 and 2018, respectively, - we estimate impact of 2.9% and 4.9% on FY17F and FY18F
overall S-REITs’ DPU, respectively. (We have also assumed that the new rates would only be
applicable to outstanding debt with floating rates.)
S-REITs’ Debt-Maturity Profile
Diagram 36. Debt-expiry profile Percentage of
total debt due
Source: Bloomberg Finance LLP, DBS Bank
Diagram 37. S-REIT debt by sector
Source: Bloomberg Finance LLP, DBS BankDBS Asian Insights
SECTOR BRIEFING 36
41
Diagram 38. Debt-maturity profile for individual S-REITs (%)
REIT Total Debt 2016 2017 2018 2019 2020 >2020
(S$bn)
AIMS AMP Capital Industrial REIT 0.61 0% 0% 31% 40% 13% 16%
Ascendas Hospitality Trust 0.54 4% 31% 37% 0% 28% 0%
Ascendas India Trust 0.40 0% 11% 12% 21% 20% 36%
Ascendas REIT 3.37 10% 6% 22% 15% 16% 31%
Ascott Residence Trust 1.98 0% 13% 11% 8% 15% 53%
Cache Logistics Trust 0.53 0% 14% 43% 34% 10% 0%
Cambridge Industrial Trust 0.53 0% 0% 29% 19% 30% 21%
CapitaLand Commercial Trust* 3.28 0% 5% 16% 21% 37% 20%
CapitaLand Mall Trust* 3.84 0% 7% 16% 13% 12% 53%
CapitaLand Retail China Trust 1.00 4% 43% 10% 18% 10% 15%
CDL Hospitality Trust 0.93 0% 0% 35% 24% 20% 22%
Croesus Retail Trust 0.78 0% 14% 41% 14% 17% 14%
Far East Hospitality Trust 0.82 5% 30% 28% 12% 0% 24%
First REIT 0.46 0% 31% 34% 26% 9% 0%
Frasers Centrepoint Trust 0.73 0% 30% 8% 16% 10% 36%
Frasers Commercial Trust 0.75 0% 24% 24% 28% 10% 13%
Frasers Hospitality Trust 0.80 0% 14% 15% 70% 0% 0%
Frasers Logistics Trust 0.52 0% 0% 0% 34% 32% 34%
IREIT Global 0.30 0% 12% 0% 49% 39% 0%
Keppel REIT* 3.32 0% 0% 14% 28% 23% 36%
Keppel DC REIT 0.34 9% 1% 44% 38% 8% 0%
Manulife US REIT 0.30 0% 0% 0% 36% 23% 41%
Mapletree Commercial Trust 2.34 0% 2% 2% 12% 19% 65%
Mapletree Greater China Commercial Trust 2.42 0% 9% 29% 16% 16% 30%
Mapletree Industrial Trust 2.11 0% 1% 9% 26% 30% 34%
Mapletree Logistics Trust 2.05 0% 1% 15% 16% 14% 54%
OUE Commercial REIT 1.28 0% 27% 49% 22% 0% 2%
OUE Hospitality Trust 0.86 0% 0% 34% 31% 34% 0%
Parkway Life REIT 0.68 2% 0% 14% 31% 27% 27%
Religare Health Trust 0.18 0% 5% 54% 35% 7% 0%
Soilbuild Business Space REIT 0.47 0% 0% 33% 6% 39% 21%
SPH REIT 0.85 0% 0% 38% 15% 33% 15%
Suntec REIT* 2.99 0% 3% 37% 27% 10% 22%
YTL Starhill Global REIT 1.14 1% 35% 28% 9% 15% 12%
Total S-REIT Debt 44.37 1.1% 8.8% 21.3% 20.4% 18.6% 29.7%
Source: Various REITs, DBS Bank
*includes debt at associate levelYou can also read
