Broker's take: DBS says Singapore retail Reits 'in for rough ride'

DBS Group Research is expecting a tougher operating environment for retail real estate investment trusts (Reits) in Singapore, citing rising consumer risk aversion and tighter government measures amid the Covid-19 outbreak. 

The research team has downgraded its calls for Frasers Centrepoint Trust, CapitaLand Mall Trust and Starhill Global Reit to "hold", while its rating for SPH Reit now stands at "fully valued". 

Within the industry, its preferred picks include Mapletree Commercial Trust (MCT) which it has a "buy" call on, along with a target price of S$1.90, given its diversified exposure. The research team also has a "buy" rating on Lendlease Global Commercial Reit, with a target price of S$0.94 citing its "bombed out valuation", DBS analysts Derek Tan and Rachel Tan wrote in a sector report released on Thursday. 

As at 3.39pm on Thursday, units in MCT were trading at S$1.62, down S$0.13 or 7.4 per cent, while units in Lendlease Global Commercial Reit were trading at 48.5 Singapore cents, down 3.5 cents or 6.7 per cent. 

"We turn cautious on the retail S-Reit (Singapore Reit) sector in view of unprecedented tightening measures introduced by the government. With a focus on conserving cash due to worsening operational outlook, we anticipate potential cuts in payout ratios (from 100 per cent to 90 per cent) for most retail S-Reits and cut our distribution per unit to the tune of 14 per cent to 27 per cent, on the back of rental rebates offered by landlords to affected tenants," the analysts noted. 

That said, they are also of the view that the balance sheets of these S-Reits should be able to withstand up to a 50 per cent drop in cash flows. 

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DBS added that further tightening rules and advisories against travelling to shopping malls and suspension of entertainment outlets or tuition centres will have a significant near-term impact on retail landlords.

Meanwhile, the potential release of a Covid-19 temporary measure Bill which absolves tenants of their rental obligations for up to six months will introduce further uncertainty to an already challenged retail sector, the analysts said. 

"The risk from the Bill is that if tenants/businesses go bust after six to 12 months even with rent deferment, landlords will be faced with a potential spike in bad debts. This is a factor we believe has yet to be addressed, to be fair to landlords who have their own obligations to fulfill," DBS noted. 

"While near-term cash flows may be hit, we estimate that interest coverage ratios of most retail S-Reits will remain above bank covenant levels of 1.5 to two times even if earnings before interest, taxes, depreciation and amortisation tumbles by 50 per cent," wrote DBS analysts Mr Tan and Ms Tan.