REITs – Phillip
We compile the recently concluded quarterly financial results for the SREITs and did a comparative study to understand the trend in the underlying sectors.
Observations
For the office sector, y-y revenue showed greater improvement than q-q revenue because of positive rental revision of leases that were renewed over the period. The 13.2% q-q improvement in Frasers Commercial Trust was due to contribution from a new property and also favourable exchange rate movement. Office leases typically have lease period of 1-3 years and leases that were renewed in the recent period came from a low base previously, thereby there is still some degree of positive reversion. The URA rental index has come down 26.6% from its peak in 2Q2008. Although the office sector is still showing signs of weakness, rate of decline has slowed down. On the other hand, vacancy rate has also crept up to 12.2%.
The retail sector showed a similar trend as the office sector, except for smaller variability in the revenue, which suggests more resiliency than the latter. Anecdotal evidence from the results of Fraser Centrepoint Trust and CapitaMall Trust indicated that suburban malls perform better than downtown malls. Fraser Centrepoint Trust, which has assets located in the heartland areas, showed better y-y and q-q improvement compared to CapitaMall Trust, which has a greater presence of its portfolio located at the core downtown area. Suntec REIT results were partly affected by its office portfolio, which contributed 46% to revenue. The rental index for retail sector has remained relatively stable compared to the office and industrial sectors, with a decrease of 7.6% from its peak. Vacancy rate is at an all-time low of 6%.
Except for Mapletree Logistic Trust which had a 10.4% increase in y-y revenue that was boosted by contributions from acquisitions, the industrial sector shows little variability in core rental revenue both on a y-y and q-q basis. Occupancy rate for the listed REITs has also maintained at a high level of close to full occupancy. The stable revenue is premise on the typical longer lease terms of industrial properties and also the step-up component built into the leases. The URA rental index shows that 3Q2009 reading has came off 16.8% from its peak in 3Q2008 while vacancy rate is approximately 8%.
The hospitality sector shows great contrast between the y-y and q-q revenue. This is likely to be expected as hospitality properties such as hotels and service apartments have very short-term contracts with their tenants and are very dependent on the economic cycles. We can observe that q-q revenue has shown positive improvement compared to the decline observed for y-y revenue, indicating that the worst period for the sector is probably over. Tourist arrivals and hotel occupancy also saw their first month of positive y-y increase for this year in September. The healthcare sector has stayed defensive and is not subjected to the cyclicality of the economy.
Conclusion
On the overall, we believe the rental market for the office market could be bottoming and should begin to recover in the second half of 2010, premised by our observations in earlier reports that the rental index tends to drop by approximately 30% from its peak over a peak-trough cycle. The retail sector appears to be holding up quite well and as the population is decentralizing to the suburban areas, there will be demand
for retail spaces in these areas. We believe the rental index for industrial sector could still face a downward trend, however occupancy should be well-supported. The hospitality sector namely the tourism industry has already shown signs of turning around and should continue to pick up as the economy improves further.
In conclusion we have a bullish view on the hospitality, healthcare and retail sectors, neutral on the office sector and bearish on the industrial sector.