S-REITs' income hit by virus crisis

Commercial properties suffer as consumers hold back from shopping and eating outside.

The income and operations of S-REITs in the retail and hospitality sectors could be dented as consumers continue to hold back from shopping and eating outside amidst the COVID-19 outbreak.

In order to soften the effects of the outbreak on retail REITs, they will receive a 15% tax rebate for qualifying commercial properties from the Singapore government.

According to Maybank Kim Eng, retail REITs will fully pass this onto their tenants, in addition to various assistance schemes, with food & beverage (F&B) tenants being the main target as they now comprise 12-38% of gross rental income and could lower their net property incomes (NPI).

“The retail landscape could, however, be supported with the delay of a GST hike in 2021, and the one-off cash hand-out for each adult Singaporean,” said Maybank KE analyst Chua Su Tye.

Apart from REITs in the retail sector, those in hospitality will get 30% property tax rebates for the loss of income on the back of lower occupancies in hotels and serviced apartments.

This supportive measure may not be enough, however, as Chua said hospitality REITs will still suffer from limited near-term demand visibility as tourist arrivals could fall by 25-30% in 2020 if the COVID-19 outbreak is prolonged.

“Near-term DPU risks lie on the downside, with slower occupancies due to postponements and cancellations. There is seasonality in hospitality sector earnings, which are positively biased towards H2, and which typically generate 55-60% of the REITs’ NPIs,” Chua added.

Things aren’t any better for the industrial sector which has likely bottomed out, according to Maybank KE. Ascendas REIT’s Singapore properties achieved a stronger +8.8% rental reversion, up from +4.0% in the earlier quarter, with positive reversions across all its asset classes and better performance for its business parks (+9.2% in FY19) that resulted in a 40-50bp tightening of its cap rates.

In contrast, things look up for REITs in the commercial sector, which had stronger distribution per unit (DPU) growth than other segments in 2019.

Mapletree Commercial Trust (MCT) delivered 5.6% YoY DPU growth, due to the better-than-expected accretion from the MBC II acquisition.

Ascott Residence Trust’s (ART) DPU also rose at the same rate thanks to capital distribution. “Its $160m in residual divestment gains could boost capital distributions amidst slower DPU growth,” Chua said.