Singapore retail REITs to further flounder in 2016, say analysts

Office REITs are a safer bet.

Investors would do well to take shelter in office REITs in the near-term, as a flurry of headwinds are expected to batter the local retail REIT scene.

According to a report by CIMB, going into the next few quarters, office REITs are likely to enjoy positive rental reversions for this year as expiring rents are still some 10% below current market levels.

Further, CIMB projects office REITs to nab the steepest average DPU growth of 5.2% YoY for FY16. That said, the spread between passing and market rents are likely to narrow, as market rents slide in anticipation of the incoming supply glut.

Lastly, very few renewal risks are expected for 2016 as landlords have been adopting a defensive tenant retention strategy. Most office REITs have minimal leases to be renewed for the rest of 2016.

Meanwhile, retail REITs will likely feel the impact of more asset enhancement initiatives (AEIs). This would disrupt earnings as occupancy becomes adversely affected by ongoing renovation works.

As such, CIMB sees local retail REITs to deliver a smaller 1% rise in DPU for FY16.

“The drag comes largely from Capitaland Mall Trust, which is expected to close its Funan IT Digital Mall for three years starting Jun 2016 to redevelop the property into a larger lifestyle mall,” CIMB notes.

As a result, DPU growth is expected to decelerate going into the second half of the year.

CIMB estimates that earnings growth could be affected as well. Frasers Centrepoint Trust’s Northpoint property will likely see occupancy dip to 76% over the next six months due to renovation works ahead of the property’s seamless integration with the new Northpoint City, currently under development.