CES is really at a sweet spot now with its Alex Hotel ready to commission soon and ride on the hospitality wave
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(source - UOB Kiay Hian)
Maintain MARKET WEIGHT; top picks are CCT, CDREIT and ART. We believe the tax
incentives for REITs will largely be extended in the upcoming budget. We continue to prefer
REITs exposed to the office and hotel segments with CCT, CDREIT and ART as our top
picks.
• High-beta office and hotel REITs to outperform as S-REITs transition from being
viewed as yield vehicles to growth vehicles led by the rental growth pick-up in the office
segment. Regional yield spreads remain the most attractive for S-REITs with yield
spreads of 4.0%. Though this is in line with the historical spread of 3.9%, yield spreads
have previously shrunk to 2.8% during periods of growth (eg 2004-07), implying over 45%
upside potential still.
• Office gaining from strength to strength. While office REITs are up 0.3% ytd, upcycle
yield spreads suggest another 60% upside potential. Occupancies hit new 5-year highs at
96.2%, sparking a 14% rise in rentals last year. As earlier anticipated, demolitions and
redevelopments caused a ~1m sf fall in the net supply of office in 2014. While office
demand is expected to remain stable in the light of the moderate GDP growth momentum,
we anticipate that the supply shortfall, together with high pre-commitments for upcoming
space, could support 10-15% rental growth in 2015.
• Hotel segment will be the next to move after office. We see attractive investment
opportunities in the hotel segment presented by the yield gap of 300-400bp between hotel
REITs (6.0-7.9%) and physical hotel transactions (3-4% unlevered yields). We expect the
yield gap to narrow as hotel RevPARs start turning around this year (3-5% pa in 2015-17)
after bottoming out in 2014. The modest growth will be driven by sustained high
occupancy levels driven by a demand pick-up from the recently-opened Sports Hub
(particularly SEA Games 2015) and opening of new attractions (eg National Gallery). 