3q15 results preview - listed...

Singapore REITsSector outlook

Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com

For important disclosures please refer to page 16.

Yew Kiang [email protected]+65 6416 7885

12 October 2015

SingaporeProperty

AREIT SP (Top pick)Mkt cap: US$4.1bn3M ADTO: US$17.5mTP: S$2.55Rec: BUYFwd Yield: 6.5%

FCT SP (Top pick)Mkt cap: US$1.3bn3M ADTO: US$1.8mTP: S$2.00Rec: OPFFwd Yield: 6.1%

MLT SPMkt cap: US$1.8bn3M ADTO: US$3.8mTP: S$1.10Rec: OPFFwd Yield: 7.2%

CREIT SPMkt cap: US$0.6bn3M ADTO: US$0.7mTP: S$0.65Rec: OPFFwd Yield: 8.4%

CCT SPMkt cap: US$3.0bn3M ADTO: US$10.7mTP: S$1.42Rec: OPFFwd Yield: 6.8%

www.clsa.com

3Q15 results previewWatch out for office and retail trends; top pick – AREITWhile office and retail Reits are likely to report weaker operating metrics, we expect S-Reits to report earnings broadly in line with our expectations with no major surprises. The Fed’s decision to delay the rate hike coupled with S-Reits trading at 382bps or 59bps above the historical average of 323bps suggests S-Reits valuations are undemanding. However, deteriorating fundamentals particularly in the office and retail sector underpins our neutral weighting on the sector. We remain selective from a bottom up approach and prefer the industrial and suburban retail centric Reits AREIT (top pick) and FCT.

S-Reits kick off results q S-Reits kick off results this week and we expect no major earnings surprises.q We expect deterioration in the following operating metrics: office rents, retail rental

reversions, and retail tenant sales growth.q Occupancies across all subsectors will be firm in our view and industrial occupancies

could firm up over the coming quarters on the back of relaxation in subletting rules.q Gearing across Reits will trend up given the announced acquisitions but this will be

masked by the use of perpetual securities, classified at equity instead of debt.

Office: rents to soften despite some pre-leasingq We expect weakness in office rents to accelerate in 2H15. Our S$10.50psf prime

grade A rents forecasts for 2015 imply a 7.1% correction for 2H15 and a further 9.5% YoY decline in 2016 to S$9.50psf amid weak demand and rising supply.

q While other consultants have yet to release preliminary estimates for 3Q15 office rents, DTZ reported a 4.1% QoQ decline in office rents for 3Q15 to S$10.40psf, the first decline from an uptrend since 2013 according to their portfolio basket. CBREwhich has yet to report 3Q15 rents saw the first office rent decline back in 2Q15.

q Leasing activity was weak as financial institutions remain cautious on expansion plans. Google’s and Microsoft’s decentralization move will further weigh on prime rents in our view.

q Despite this, CapitaGreen’s committed occupancy rose marginally to 83% in September, from 80.4% in June, while GuocoLand also pre-leased 31,000sqf at Guoco Tower to a gym operator, Virgin Active. Checks also suggest pre-commitment for integrated project, DUO, jointly developed by Temasek and Khazanah reached around 30% (inclusive of Abbott Laboratories who signed 100,000sqf of the 570,000sqf total).

q Compared to six months ago, our checks suggest rent free periods for leases have risen from typically 3 months to the current 4 to 5 months dangled by landlords.

q Given the deteriorating outlook in office rents over the next 12 months, it is unsurprising more owners are putting up office assets for sale in the market.

q The ICS Building (137 Cecil Street) is the latest office tower to be acquired by a Shanghai investor for S$220m (S$3,132psf).

q Other office towers up for sale in the market include (1) Asia Square Tower 1 and potentially Tower 2 for potentially S$7bn or S$3,200 psf NLA, (2) CPF Building for potentially S$450m or S$1,385 psf NLA, (3) Robinson 77 for potentially S$2,200 psf NLA, and (4) a 50% stake of 78 Shenton Way for potentially S$335m or S$1,850psf NLA.

q Meanwhile, strata office sales volume also declined 47.4% QoQ with the resale median price slipping 3.5% QoQ to S$1,882 psf.

Retail: healthy pre-leasing but facing structural headwindsq The retail leasing trend has been fairly resilient with upcoming Waterway Point (JV

between FCL/FE/Sekisui) more than 90% pre-leased about six months ahead ofopening. Around 43% of mall tenants will be from the retail sector, 30% will be from the F&B sector, and 15% will be from the lifestyle and entertainment sector.

http://www.clsa.com/


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3Q15 results preview Singapore REITs

12 October 2015 [email protected] 2

q The consolidation trend among retailers persisted in the quarter with (1) HMV closing its last shop in Singapore and (2) Metro expecting to close its store at City Square Mall (owned by CDL) when its lease expires at the end of the year.

q However, new brands also entered Singapore such as (1) American skincare brand Origins, which opened its first flagship store at Ion Orchard, (2) high-street department store John Lewis opening three stores at Heeren, Raffles City, and Jem at Jurong East, and (3) French Italian apparel Moncler at Ion Orchard.

q Capital values remains lofty as evidenced by CMT’s latest acquisition of Bedok Mall at a 5.1% NPI yield versus previous transactions at 5.4%.

q Our negative view on the retail outlook remains unchanged. The structural downtrend due to a tight labour market squeezing tenant’s profitability will weigh on landlord’s ability to sustain positive rental reversions in our view.

q Furthermore, with the soft tourism market and weak economic growth in Singapore, we expect malls with higher exposure to discretionary spending to be negatively impacted. Suburban malls should fare better in our view.

Industrial: looking more at Australia, some positive news flowq The negative margin pressure trend stemming from the conversion of single assets

to multi-tenanted assets seems to be abating with some Reits reporting stabilising NPI margins and improvement in occupancies.

q The recent relaxation of subletting policies by JTC to reduce the anchor tenant space requirement from 1,500 to 1,000sqm is also a positive news flow for theindustrial sector in our view, although the earnings impact will be limited.

q We expect industrial rents for 3Q15 to remain firm with some improvement in occupancies among industrial Reits.

q That said, acquisition opportunities within the Singapore market will be challenging as evidenced by the recent wave of acquisitions in overseas market.

q In particular, the Australia market has been the top destination choice for industrial Reits in search of inorganic growth presumably on the back of Australia dollar weakness, quality of assets, and relatively decent yields.

q AREIT and MLT announced their maiden entry into Australia with AREIT acquiring a portfolio of industrial assets from GIC worth S$1bn at a 6.0% NPI yield while MLT also bagged a chilled distribution centre in Sydney from Goodman Group for a consideration of A$253m at a 5.6% NPI yield. Lastly, Cache Logistic increased its presence further with another acquisition in Brisbane at a ~7.0% NPI yield.

q While all the deals mentioned above are yield accretive, pricing seems to be leaning toward the high side when compared against market yields.

q Among these deals, we view AREIT’s acquisition more positively given the larger scale of the portfolio which enables AREIT to be a key market player.

Hospitality: recovering from a low base, venturing overseasq Tourist arrivals picked up in July, up 7.7% YoY. Chinese and Indonesia tourist

arrivals recovered 36% YoY and 2.8% YoY off a low base last year, while Australia dipped 8.5% YoY.

q With the weakness in regional Asean currencies, Ringgit, and Rupiah, the recovery in tourist arrivals from these two segments might be short-lived in our view.

q We think capital value remains high in Singapore, prompting hospitality S-REITs to venture overseas. ART announced its first acquisition in US, 411-key Element New York Times Square West Hotel, for S$221m at 6.2% Ebitda yield. CDREIT also announced its first acquisition in UK, the Cambridge City Hotel, for S$136m at a 5.6% NPI yield.

Maintain Neutral on S-Reits; top picks AREIT and FCTq S-Reits are trading at 382bps above 10-year bonds, 59bps above the historical

average of 323bps. We reiterate our Neutral view on S-Reits and preference for industrial and suburban retail centric plays, AREIT and FCT.

q Against historical valuations, only office and hospitality Reits are trading well above historical average yields, reflecting the weaker underlying fundamentals for both sectors while industrial and retail are trading close to historical average yields.




Figure 1

Sector gearing

Source: CLSA, company data

Figure 2

Office spot rents fell QoQ in 2Q15; we expect 3Q15 to be soft as well

Source: CLSA, CBRE

Figure 3

Office average rents signed in 2Q15


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KREIT

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UECT

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ICART

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CREIT C

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AAREIT

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TCCT

FCT

CRCT

KD

CREIT

SPH

REIT

AIT

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T

(%)Gearing at 30-Jun-2015

Sector average: 34.4%

Regulatory Limit: 45%

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(S$psf/mth) Grade A Grade B Island-wide

11.30

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8.88

9.14

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(S$psf) CCT - passing rents S$psf

Suntec - Ave office rents signed in the qtr S$psf

2Q15 marked the first decline in office rents after

six quarters of growth

2Q15 Prime Grade A: S$11.30psf QoQ: -0.9%YoY: +6.6%

2Q15 Grade B: S$8.00psf QoQ: -0.6%YoY: +3.9%

DTZ reported a 4.1% QoQ decline in office rents for

3Q15 to S$10.40psf

The rent free period offered rose to 4-5 months now compared to ~3 months

earlier this year

Leasing activity still muted

Pre-commitment at CapitaGreen rose to 83%

(80.4% in 2Q15)

Guoco Tower signed its first retail tenant while

checks suggest DUO is now 30% leased. Still no pre-

commitment at Marina One

CCT: S$8.88 psf passing(+7.9% YoY & +1.1% QoQ)

Suntec: signed rents down QoQ to S$9.14psf from

S$9.24psf in 1Q15(+1.8% YoY)

In 3Q15, SREITs continued to acquire

assets using debt and equity

Notably, industrial Reits have been actively acquiring assets in

Australia

With the MAS now imposing a 45% leverage

limit for all SREITs, we expect investor attention

to focus on Reits with gearing at or above 40%

like KREIT, OUEHT, OUECT, MAGIC and ART




Figure 4

Occupancy office Reits


Figure 5

Retail spot rents (rental gap narrowed to S$3.70psf/month)

Source: CLSA, CBRE

Figure 6

Most Retail Reits feeling downward pressure on reversions

Source: CLSA. Note: Data for FCT shown above trend line, CMT is shown below trend line.

92%

93%

94%

95%

96%

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98%

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K-Reit SG portfolio Suntec CCT Starhill - SG

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(S$psf/mth) Prime Suburban

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4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

(%) FCT CMT

Office occupancy remained flattish, for now

CCT: 99.7% unchanged, CapitaGreen 83% pre-

committed as of September2015

The ICS Building (137 Cecil St) sold for S$3,132psf

Other sellers lining up:Asia Square, Capital

Square, CPF building, Robinson 77, and 78

Shenton Way

The consolidation trend among retailers persisted

in the quarter with

(1) HMV closed its last shop in Singapore and,

(2) Metro is expecting to close its store at City

Square Mall

Our negative view on retail outlook remains

unchanged

The structural downtrend due to a tight labour

market squeezing tenant’s profitability will

weigh on landlord’s ability to sustain positive

rental reversions in our view




Figure 7

Retail Reits have been achieving weaker occupancies

Source: CLSA, company data. *Suntec’s occupancy reflects area unaffected by AEI

Figure 8

Industrial spot rents

Source: CLSA, CBRE

Figure 9

YoY industrial spot rents

Source: CLSA, CBRE

82%

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Suntec FCT CMT Starhill - SG

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(S$psf/mth) Business Park (off central)

Business Park (rest of the island)

Factory (Ground floor)

Warehouse (Ground floor)

BP (off central): S$5.50

Factory: S$1.85

Warehse: S$1.83

BP (rest of island) : S$3.65

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Business Park (off central) Business Park (rest of the island)Factory (Ground floor) Warehouse (Ground floor)

The retail leasing trend has been fairly resilient

with upcoming Waterway Point (JV between

FCL/FE/Sekisui) more than 90% pre-leased

about six months ahead of opening

43% - retail sector30% - F&B sector

15% - lifestyle and entertainment

Industrial rents held flat sequentially in 2Q15

We expect 3Q15 rentals to be firm

Mixed showing – in 2Q15, most industrial classes

saw flat YoY rents except for business parks on the rest of the island, where rents are down 5% YoY

Business parks (off central): unchanged

Biusiness parks (rest of island): -5.2% YoY

Factory: unchangedWarehouse: unchanged




Figure 10

Occupancy improvements for some industrial Reits


Figure 11

REVPAR trend for hospitality Reits (Singapore portfolio only)

Source: CLSA, company data. Note OUEHT data not yet available for 2Q15.

Figure 12

Singapore tourist arrivals

Source: STB

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(%) AREIT MLT MINT

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(%) ART SP - SG port CDREIT - SG port

OUE H-Trust (Mandarin Orchard) MBS

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REVPAR SG Visitor Arrivals (RHS)

Occupancies improved for some industrial Reits

The recent relaxation by JTC on subletting rules is

positive for the sector

CDL H-Reit: 2Q15 RevPar fell 4.4% YoY to SGD

173/day (disappointing but an improvement from

last quarter’s 9.9% decline)

ART’s Singapore assets also saw RevPAU declines

of 1.9% YoY (vs -3.9% YoY in 1Q15), while

FEHT’s serviced residence assets reported -5% YoY

RevPAU growth

From January to July2015, visitor arrivals have

fallen 6.6% YoY

Chinese arrivals are recovering, up 36.4% YoY in July 2015 due to a low

base

Visitor arrivals from other markets like Indonesia

and Australia remain weak




Figure 13

Office Reits dividend yield

Source: CLSA, Bloomberg

Figure 14

Retail Reits dividend yield


Figure 15

Industrial Reits dividend yield


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(%) Office

Average +1 Stdev -1 Stdev

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(%) Retail


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(%) Industrial


Retail Reits are trading at a 6.54% forward yield

Office Reits are trading at a 6.72% forward yield

Industrial Reits are trading at a 7.51%

forward yield




Figure 16

Hospitality Reits dividend yield


Figure 17

Healthcare Reits dividend yield


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(%) Hospitality


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(%) Healthcare


Hospitality Reits are trading at a 7.75%

forward yield

Healthcare Reits are trading at a 6.62%

forward yield




Figure 18

Reits PB valuation


Figure 19

Reits dividend yield


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H'care Hospitality Industrial Office Retail

(x) REITS PB valuation

Low --> Mid Mid --> High Current PB Peak

CurrentAve

Trough

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H'care Hospitality Industrial Office Retail

(%) REITS Dividend YieldLow --> Mid Mid --> High Fwd Dividend Yield

Peak

CurrentAve

Trough

45% 36%




Figure 20

S-Reits versus MAS 10-year bond yields


Figure 21

S-Reits yield gap


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(%) FSTREI Index MASB10Y Index

Current: 382bpsMax: 1499 bpsAve: 323 bpsMin: -47 bps

Avg pre GFC: 159 bpsAvg ex GFC: 260bpsAvg post GFC: 372bps

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(%) Current: 382bps+1 S.D: 581bpsAve: 323bps-1 S.D: 86bps

S-Reits are trading at 382bps above 10-year

bonds, above the historical average of

323bps

The S-Reits yield gap is 59bps above the historical

mean




Figure 22

S-Reits price to book


Figure 23

S-Reit valuations


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(x)

Current: 0.94x+1 S.D: 1.15xAve: 0.97x-1 S.D: 0.79x

TickerPrice

S$

Market Cap

US$m

3mth ADTO US$m

P/NAV (x)

Prem/Disc to

NAV (%)DPU 15

(S¢)DPU 16

(S¢)Yield 15

%Yield 16

%

DPU growth

YoY Target RecHealthcare

Parkway Life Reit PREIT SP 2.28 988 1.3 1.34 33.7 12.8 12.2 5.6 5.4 (4.7) NR NRFirst Reit FIRT SP 1.31 702 0.9 1.20 19.9 8.5 8.8 6.5 6.7 3.5 NR NRReligare Healthcare RHT SP 1.00 568 0.9 1.13 13.1 8.0 8.9 8.0 8.9 11.3 NR NRAverage 753 1.0 1.24 24.2 10.3 10.3 6.5 6.7 0.6

HospitalityAscott Residence Trust ART SP 1.23 1,360 2.7 0.92 (8.3) 8.5 9.2 6.9 7.5 8.9 1.20 U-PFCDL Hospitality Trusts CDREIT SP 1.36 957 2.0 0.82 (18.3) 10.5 10.9 7.7 8.0 3.8 NR NRFar East Hospitality Trust FEHT SP 0.69 882 0.6 0.72 (28.3) 4.8 4.8 7.0 7.0 0.0 NR NROUE Hospitality Trust OUEHT SP 0.81 773 0.8 0.90 (10.2) 6.6 6.8 8.1 8.4 3.0 NR NRFrasers Hospitality Trust FHT SP 0.76 734 0.3 0.90 (10.1) 6.1 6.2 8.1 8.2 1.6 NR NRAscendas Hospitality Trust ASCHT SP 0.66 528 0.6 0.96 (4.3) 5.6 5.7 8.5 8.6 1.8 NR NRAverage 872 1.2 0.86 (13.7) 7.3 7.6 7.6 7.9 4.4

IndustrialAscendas Reit AREIT SP 2.38 4,106 24.4 1.08 8.0 14.6 15.5 6.1 6.5 6.4 2.55 BUYMapletree Industrial Trust MINT SP 1.54 1,947 4.9 1.13 13.3 10.6 10.9 6.9 7.1 2.8 NR NRMapletree Logistics Trust MLT SP 1.02 1,802 5.3 0.95 (5.0) 7.5 7.3 7.4 7.2 (2.1) 1.10 O-PFAIMS AMP Capital Industrial AAREIT SP 1.39 630 1.1 0.92 (8.3) 12.0 12.0 8.7 8.7 0.0 NR NRCache Logistic Trust CACHE SP 1.04 582 2.0 1.07 6.7 8.4 9.0 8.1 8.7 7.1 NR NRCambridge Industrial Trust CREIT SP 0.63 578 0.9 0.91 (9.4) 5.1 5.3 8.1 8.4 3.2 0.65 O-PFAscendas India Trust AIT SP 0.87 573 0.8 na na 5.5 6.0 6.4 6.9 9.1 NR NRSoilbuild Biz Space SBREIT SP 0.83 551 1.1 1.06 5.8 6.3 6.4 7.6 7.8 1.6 NR NRSabana Shariah Reit SSREIT SP 0.79 411 0.6 na na 7.3 7.1 9.3 9.0 (2.7) NR NRViva Industrial Trust VIT SP 0.76 384 0.3 na na na na na na na NR NRAverage 1,156 4.1 0.92 (7.9) 10.3 10.7 6.8 7.0 4.1

OfficeCapitaCommercial Trust CCT SP 1.39 2,928 15.0 0.79 (21.0) 8.9 9.5 6.4 6.8 6.3 1.42 O-PFSuntec Reit SUN SP 1.61 2,893 9.8 0.71 (29.2) 9.9 10.5 6.2 6.5 5.9 1.50 U-PFKeppel Reit KREIT SP 0.99 2,270 4.8 0.66 (33.6) 7.1 6.9 7.1 7.0 (2.2) 1.00 U-PFFrasers Commercial Trust FCOT SP 1.39 782 1.2 0.85 (14.7) 9.8 10.0 7.1 7.2 2.0 NR NROUE Commercial REIT OUECT SP 0.66 602 0.4 0.61 (39.4) 5.3 5.3 8.1 8.2 0.7 0.60 U-PFAverage 1,895 6.2 0.74 (26.4) 8.6 9.0 6.7 6.9 3.9

RetailCapitaMall Trust CT SP 1.98 5,017 18.4 1.08 8.4 11.1 11.5 5.6 5.8 3.4 2.00 U-PFMapletree Commercial Trust MCT SP 1.34 2,025 3.0 1.04 3.6 8.1 8.4 6.1 6.3 3.7 NR NRMapletree Greater China MAGIC SP 0.97 1,904 4.1 0.82 (18.4) 7.1 7.2 7.3 7.4 1.4 NR NRSPH Reit SPHREIT SP 0.96 1,731 1.2 1.02 2.4 5.3 5.6 5.5 5.9 5.7 NR NRFrasers Centrepoint Trust FCT SP 1.97 1,294 2.5 1.05 4.6 12.1 12.1 6.1 6.1 0.3 2.00 O-PFStarhill Global REIT SGREIT SP 0.78 1,219 2.0 0.81 (18.8) 5.4 5.6 6.9 7.2 3.7 NR NRCapitaRetail China Trust CRCT SP 1.47 884 2.2 0.83 (16.6) 10.8 11.0 7.4 7.5 1.9 NR NRLippo-Mall Retail Trust LMRT SP 0.34 670 1.0 0.80 (20.2) 3.0 3.1 9.0 9.3 3.3 NR NRAverage 1,680 3.9 0.98 (1.8) 8.7 9.0 6.3 6.5 3.1

Reits are now trading slightly below mean

valuations, at a 0.94x PB




Valuation details - Ascendas Real Estate Investment Trust AREIT SPOur target price is DCF based using a long-run risk free assumption of 3% and a 6% equity risk premium with a long-run risk adjusted average beta. We also assume a long-term growth rate of 1.0%.

Investment risks - Ascendas Real Estate Investment Trust AREIT SPKey risks include a faster than expected rise in interest rates negatively impacting earnings and valuation. A sharp slowdown in regional trade for Singapore could result in lower demand for industrial space and hence lower rents. Regulatory risks in the form of more stringent measures affecting the industrial segment could also result in lower margins. Over the medium term, the execution of Iskandar region as a competing industrial hub could see tenant base relocating out of Singapore given the large cost differential. The ongoing labour tightening in Singapore could see more SMEs adjusting to these new business conditions and demand from these tenants could be a risk in future.

Valuation details - Ascott Residence Trust ART SPOur target price is DCF based using long run risk free assumption of 4.4% weighted by its exposure to the respective risk free rates in countries which ART operates and 6% equity risk premium with long run risk adjusted average beta. We have also assumed a long term growth rate of 1.0%.

Investment risks - Ascott Residence Trust ART SPKey risks include a faster than expected rise in interest rates negatively impacting earnings and valuation. A global slowdown in foreign direct investments could negatively impact demand for its serviced apartments in Europe and Asia. Sharp movements in foreign currencies could also result in earnings volatility given its diversified geographical exposure.

Valuation details - Cambridge Industrial Trust CREIT SPOur target price is DCF based using long run risk free assumption of 3% and 6% equity risk premium with long run risk adjusted average beta. We have also assumed a long term growth rate of 1.0%.

Investment risks - Cambridge Industrial Trust CREIT SPKey risks include a faster than expected rise in interest rates negatively impacting earnings and valuation. A sharp slowdown in regional trade for Singapore could result in lower demand for industrial space and hence lower rents. Regulatory risks in the form of more stringent measures affecting the industrial segment could also result in lower margins. Over the medium term, the execution of Iskandar region as a competing industrial hub could see tenant base relocating out of Singapore given the large cost differential. The ongoing labour tightening in Singapore could see more SMEs adjusting to these new business conditions and demand from these tenants could be a risk in future.

Valuation details - CapitaLand Commercial Trust Ltd CCT SPOur target price is DCF based using long run risk free assumption of 3% and 6% equity risk premium with long run risk adjusted average beta. We have also assumed a long term growth rate of 1.0%.




Investment risks - CapitaLand Commercial Trust Ltd CCT SPKey risks include a faster than expected rise in interest rates negatively impacting earnings and valuation. An unexpected macro shock could see tenants cutting back demand for office space particularly for tenants operating in the banking and financial sector.

Valuation details - Frasers Centrepoint Trust FCT SPOur target price is DCF based using long run risk free assumption of 3% and 6% equity risk premium with long run risk adjusted average beta. We have also assumed a long term growth rate of 1.0%.

Investment risks - Frasers Centrepoint Trust FCT SPKey risks include a faster than expected rise in interest rates negatively impacting earnings and valuation. Declining disposable income could also weigh on retail operations and hence rents for its predominantly suburban portfolio. A strengthening of the Singapore dollar against regional currencies could also result in lower tourism receipts which could marginally affect some of its portfolio.

Valuation details - Keppel Reit KREIT SPOur target price is DCF based using a long-run risk-free assumption of 3% and a 6% equity risk premium with a long-run risk-adjusted average beta. We have also assumed a long-term growth rate of 1.0%.

Investment risks - Keppel Reit KREIT SPKey risks include a faster-than-expected rise in interest rates negatively impacting earnings and valuation. An unexpected macro shock could see tenants cutting back demand for office space particularly for tenants operating in the banking and financial sector. Further weakening of the Australian dollar could also erode earnings generated from its Australia operations.

Valuation details - OUE Commercial Real Estate Investment Trust OUECT SPOur DCF derived target price is based on a cost of equity of 7.6% and a terminal growth rate of 1.0%. We use a risk-free rate of 3.14% to account for OUECT’s overseas exposure. This is slightly higher than the 3% we would use for a company that is exposed only to Singapore. The beta we use is 0.75, which is closer to the observed beta of office REITs at ~0.8 than the stock’s observed beta of 0.58 since listing in 2014.

Investment risks - OUE Commercial Real Estate Investment Trust OUECT SPSubstantial deterioration to real estate fundamentals in both Singapore and Shanghai office market will affect OUECT’s earnings. A sudden and disorderly rise in interest rates rise will increase interest cost and push reit valuations lower. 35% of topline is sourced from China, reit earnings might be negatively affected should RMB depreciates substantially vs the SGD, reducing Lippo Plaza’s contribution. MAS is currently reviewing the gearing limit for reits. Should it be pegged at the current level of 45%, this might limit OUECT’s ability to increase its leverage, which might potentially raise its cost of funding and consequently, long-term growth.




Valuation details - Suntec Real Estate Investment Trust SUN SPOur target price is DCF based using long run risk free assumption of 3% and 6% equity risk premium with long run risk adjusted average beta. We have also assumed a long term growth rate of 1.0%.

Investment risks - Suntec Real Estate Investment Trust SUN SPKey risks include a faster than expected rise in interest rates negatively impacting earnings and valuation. An unexpected macro shock could see tenants cutting back demand for office space particularly for tenants operating in the banking and financial sector. Declining disposable income and slowdown in tourism receipts could also weigh on Suntec's retail operations. Further weakening of the Australian dollar could also erode earnings generated from its Australia operations.


Important disclosures Singapore REITs


Companies mentioned AIMS AMP Ind Reit (N-R)AIT (N-R)Ascendas (AREIT SP - S$2.38 - BUY)¹Ascott RT (ART SP - S$1.23 - UNDERPERFORM)¹Cache Log (N-R)Cambridge Ind (CREIT SP - S$0.63 - OUTPERFORM)¹CapitaGreen (N-R)CapitaMall Trust (CT SP - S$1.98 - UNDERPERFORM)¹CapitaRetail (N-R)CBRE (N-R)CCT (CCT SP - S$1.39 - OUTPERFORM)¹CDL Hosp Trust (N-R)CMT (N-R)DTZ Debenham (N-R)Far East Consortium (N-R)Far East H-Trust (N-R)FC Trust (N-R)FCL (FCL SP - S$1.56 - BUY)¹FCT (FCT SP - S$1.97 - OUTPERFORM)¹First Real Estate (N-R)GIC Private Limited (N-R)Goodman (GMG AU - A$5.87 - BUY)¹Google (GOOGL US - US$643.61 - BUY)²Guocoland (N-R)HMV (N-R)JTC (N-R)Keppel Reit (KREIT SP - S$0.99 - UNDERPERFORM)¹Khazanah (N-R)LMIR Trust (N-R)Mapletree Ind (N-R)MapletreeLog (MLT SP - S$1.01 - OUTPERFORM)¹MCT (N-R)Metro (N-R)MGCCT (N-R)Microsoft (MSFT US - US$47.11 - OUTPERFORM)²OUE C-Reit (OUECT SP - S$0.66 - UNDERPERFORM)¹OUE H-Trust (N-R)Parkway Life Reit (N-R)Sabana Reit (N-R)Sekisui House (1928 JP - ¥2,036 - BUY)¹Soilbuild Reit (N-R)SPH Reit (N-R)Starhill Global Reit (N-R)Suntec Reit (SUN SP - S$1.61 - UNDERPERFORM)¹Temasek (N-R)Virgin Active (N-R)

¹ Covered by CLSA; ² Covered by CLSA Americas

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