Singapore Property & REITs

Transcription

1 Singapore Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 15 Dec 2017 The Quantum Leap The Singapore property market is at the start of a multi-year upturn STI : 3, Analyst Developers to continue re-rating as expectations are turned into reality Derek TAN Mervin SONG, CFA derektan@dbs.com mervinsong@dbs.com Singapore REITs climbing over the interest rate worry as growth momentum sets in Rachel TAN racheltanlr@dbs.com Singapore Research Team equityresearch@dbs.com Cyclicals will do well as positive market sentiment drives valuations higher Singapore property market in a multi-year upturn. We remain bulls in the Singapore property market as we believe that most real estate subsectors have turned the corner on the back of improving demand-supply dynamics. Supporting a more buoyant outlook for landlords (REITs) and developers are that abating supply risk, which will drive prices and rentals higher as the year goes by. Leading the recovery is the residential sector (price increase of 3-5% in 2017), followed by office and hospitality sectors where improving demand-supply dynamics will drive spot rents/revpar higher. Selected industrial (warehouse and business parks) will also see better operating prospects. Developers to continue re-rating as expectations are turned into reality. With S$22.3bn of new sites in the bag, developers will have to deliver on market expectations that the strong rebound in transaction volumes will continue in 2018, translating into strong take-up rates for upcoming new launches. We believe further re-rating will be stock-specific and developers with a robust line-up of new launches will be better- positioned to ride this market upswing. Our picks are City Dev, UOL, and FCL. We also initiate coverage on mid-cap developer Roxy-Pacific, given that management has landbanked ahead of peers with most projects coming to market in Singapore REITs growth returning to drive office and hotel REITs higher. Valuations are likely to be supported by investors expectations of a return to growth in DPU profiles of S-REITs. We project S-REITs to deliver a FY18-19F DPU CAGR of 2.0%, up from a -1.0% drop in FY17F. As such, we expect yield spreads (vs 10-year bonds to compress further from 3.8% towards 3.0% (in line with its + 1 SD range). Valuations are also supportive of acquisitions and we expect REITs to remain active on that front and thus, tap the market opportunistically. STOCKS Singapore Property Clock Source: DBS Bank 12-mth Price Mkt Cap Target Price Performance (%) S$ US$m S$ 3 mth 12 mth Rating Developer City Developments , BUY UOL Group , BUY Frasers Centrepoint Ltd , (2.4) 34.6 BUY REITs Ascendas REIT , (0.4) 12.6 BUY Suntec REIT , BUY Keppel REIT , BUY Mapletree Logistics Trust , BUY Mapletree Greater China Commercial Trust , BUY CDL Hospitality Trusts , BUY Frasers Centrepoint Trust , BUY Frasers Hospitality Trust , BUY Source: DBS Bank, Bloomberg Finance L.P. Closing price as of 14 Dec 2017 ed: JLC / sa:jc, PY, CS

2 Table of Contents 1. Investment Summary 4 2. Peer Comparisons 6 3. Developers Need to deliver on market expectations Riding the positive market momentum 3.2 Majority of land tenders awarded to local players. 3.3 Which Developer has the largest land-bank? 3.4 Developer Strategy: Calibrating unit sizes to maintain affordability. 3.5 Valuations and our picks. 4. Singapore REITs Climbing the wall of worry again Interest rates a yearly concern but mitigating factors in place 4.2 Growth returns 4.3 Acquisitions expected to supplement growth 4.4 Rally in SREITs to continue on the back of tightening yield spreads 4.5 Prefer office and hospitality sectors 4.6 Top picks 4.7 Changes to TP and recommendations 5. Residential Subsector Outlook: The quantum leap up Office Subsector Outlook: A multi-year recovery Industrial Subsector Outlook: A gradual bottoming outlook Retail Subsector Outlook: Tough times yet to pass Hospitality Subsector Outlook: A muli-year upward trajectory Charts: S-REIT yield and P/Bk NAV 77 Charts: Developers P/Bk NAV Stocks Profiles 3 Note: Prices used as of 14 Dec-2017 Page 2

3 Stocks Profiles Property Stocks Profiles CapitaLand City Developments Chip Eng Seng Frasers Centrepoint Ltd Roxy-Pacific Holdings UOL Group Bukit Sembawang Estates Hong Fok Corp REITS Stocks Profiles Ascendas Hospitality Trust Ascendas India Trust Ascendas Reit Ascott Residence Trust Cache Logistics Trust CapitaLand Commercial Trust CapitaLand Mall Trust CapitaLand Retail China Trust CDL Hospitality Trust ESR REIT Far East Hospitality Trust Frasers Commercial Trust Frasers Centrepoint Trust Frasers Hospitality Trust Frasers Logistics & Industrial Trust Keppel DC REIT Keppel Reit Manulife US Real Estate Inv Mapletree Commercial Trust Mapletree Greater China Commercial Trust Mapletree Industrial Trust Mapletree Logistics Trust * OUE Commercial Trust OUE Hospitality Trust Parkway Life Real Estate Investment Trust RHT Health Trust Soilbuild Business Space Reit SPH REIT Suntec REIT Starhill Global REIT Page 3

4 1. Investment Summary The quantum leap for Singapore property. We remain bulls in the Singapore property market as we believe that most real estate subsectors have turned the corner on the back of improving demand-supply dynamics. Supporting a more buoyant outlook for landlords (REITs) and developers is abating supply risk, which will drive prices and rentals higher as the year goes by. an overhang in operational performance. We believe that the retail, hospitality, and industrial sectors are still expected to feel the pressure from projected negative net absorption, given the outlook for excess supply. Singapore Property Clock Key Themes w 1. Riding the upturn in the Singapore property market Singapore property market in a multi-year upturn. However, among the real estate sectors, we see brighter prospects in the residential market (+3%-5% price recovery annually in ) and office subsectors. Residential supply (which is at a 16-year low) and a c.60% YoY rise in transaction volumes, if sustained, will be catalysts for prices to head north in a sustained manner. We expect transaction volumes to remain robust (+5.0% in 2018), partially driven by the demand from close to 3,500 displaced households, flushed with S$7bn in proceeds from recent en-bloc sales, which will be looking for a home. Stronger-than-anticipated price gains will come from foreign buyers who, in 2017 still accounted for c.6% (vs 10% average) of total transactions. We see Singapore s luxury homes as attractive on a relative basis compared to home prices in the region. In 2018, after years of downturn, the office sector is projected to deliver 12% y-o-y growth in rentals as take-up rates for new buildings have been robust while new supply entering the market over (c.0.6m sqft per year) remains supportive of higher rents. Likewise, the hotel sector is also projected to see RevPAR growth of 3%-5% per annum over as corporate travelers return to the region amidst a robust line-up of corporate events. While the industrial sector will see a drop-off in supply risk, 2018 remains a year of absorption, as the supply surplus in the industrial space (factory) will take time to be absorbed. That said, the warehouse and business park subsegment is projected to deliver strong rental growth as supply risk in this space is minimal. While the retail sector might see a near-term lift in retail sales, high occupancy cost and new incoming supply continue to be Source: DBS Bank 2. Developers and REITs to continue the path to build AUM Divergent strategies by developers and REITs. We see divergent strategies between pproperty ddevelopers and REITs as the former look to add more significantly in Singapore to ride the property upturn while REITs, will, in our view, pursue growth overseas. Regions that we believe will remain attractive on a currency-adjusted basis are London, and Melbourne and Sydney in Australia, where returns remain attractive and likely to be value-accretive. Apart from acquisitions, REITs could also capitalise on the increased development limits (25% cap vs 10% previously subject to conditions) accorded by the Monetary Authority of Singapore (MAS) to take on more asset enhancements to rejuvenate their portfolios and boost returns. Developers to continue to see strong sell-through rates and remain hungry for more land in Singapore, albeit more selectively. With close to S$22.3bn invested in Singapore in 2017, a key data-point to watch will be the expected sellthrough rates for projects planned for launch through the year. Unlikely previous years, 2018 will see more than 60% of Page 4

5 launches (by units) at projects that were built from en-bloc sites, which are in mature estates with an inherent buyer demand. In terms of land-banking, we expect continued increased participation from developers in the upcoming first half 2018 government land sales program (GLS) and en-bloc sales, albeit more selectively especially after a year of robust M&A within the en-bloc market. Developers are likely to be more cautious in their bids after as close to 21,000 units are already in the pipeline to be launched in the coming quarters. Strategies for: Singapore REITs Re-positioning into cyclicals Entering a cyclical upturn. With most of the property subsegments entering a cyclical upturn, we believe S-REITs will maintain their current valuations. Yield spreads at 3.6% can compress further down to 3.0% in a cyclical upturn, in our view. In terms of real estate sectors, abating supply risk in most sectors (offices, hotels, business parks, and warehouses) will result in better operational prospects. We project the S- REITs DPU growth to re-accelerate over FY18-19F to 2.0% from -1.0% in FY17F. With growth returning to the system, we believe that S-REITs performance will withstand headwinds of the three rate hikes projected for The past strategy of maintaining a high fixed interest rate profile (c.75%) will minimise impact of pressures from higher refinancing costs. We estimate that a 100bps hike will only cut distribution estimates by 2%. Inorganic growth a further catalyst. Valuations at 1.1x P/NAV and forward yield of 5.8% will help REITS pursue inorganic opportunities. We believe that most REITs will continue to look for opportunities overseas. S-REITs will also take the opportunity to raise new equity to fund part of their acquisitions and recapitalise their balance sheets to position themselves for further growth. Our large-cap picks are Ascendas REIT (A-REIT), Keppel REIT (K-REIT), Suntec REIT (Suntec), Mapletree Logistics Trust (MLT), and Mapletree Greater China Trust (MAGIC). In the mid-cap space, we like Frasers Centrepoint Trust (FCT), Frasers Hospitality Trust (FHT) and CDL Hospitality Trust (CDREIT). Singapore Developers Needing to deliver on expectations Developers Strong sell-through rates a key re-rating catalyst. With S$22.3bn of new sites in the bag, 2018 will be a year when developers have to deliver on market expectations that the strong rebound in transaction volumes will continue, translating into strong take-up rates for upcoming new launches. We believe further re-rating will be stock-specific and limited to developers who are positioned to ride this market upswing. In terms of valuation, in the market upswing, we believe that developers can trade towards +1 standard deviation (S.D). implying a P/NAV of close to 1.0x. Amongst the developers, we like City Dev, UOL, and FCL. We have initiated coverage on mid-cap developer Roxy Pacific as we envision that the strong take-up rates for the seven projects it has lined up for launch in 2018 will drive NAV and RNAV closer. Risks 1. Faster-than-projected rise in shorter-term interest rates which will negatively impact earnings and potentially capital values in the medium term. 2. External shocks impacting GDP outlook and unemployment rates in Singapore, which will create an overhang on demand/supply dynamics and reduce takeup rates for residential projects. 3. Policy Risk. If the price runs faster than expected (in our view, more than 10% a year), the government could reintroduce tightening measures to curb excessive price exuberance. Indirect meaures such as curbing bank lending to developers (i.e. re-introducing lower loan-tovalue (LTV) ratios for property projects from current levels) could also curb developers aggressive stance towards paying higher prices for land as a higher downpayment will curb return on equity (ROE) as more capital is needed to be put upfront. Page 5

6 2. Peer Comparison Singapore REITs Peer Comparisons (As of 14/12/17)) REIT FYE Last Price Rec Target Price Mkt Cap Total Return (S$) (S$) S$'m (%) FY17/ 18F DPU (scts) FY18/ 19F FY19/ 20F CAGR Yield (%) P/NAV (%) FY17/ 18F Office CCT Dec BUY ,711 15% % 4.6% 4.6% 4.6% 1.05 FCOT Sep BUY ,173 14% % 6.8% 6.8% 6.8% 0.94 KREIT Dec BUY ,146 15% % 4.6% 4.6% 4.6% 0.83 OUECT Dec HOLD ,096 7% % 6.5% 6.5% 6.5% 0.74 Suntec Dec BUY ,331 15% % 4.8% 4.8% 4.8% % 4.9% 4.9% 4.9% 0.94 Retail CRCT Dec BUY ,443 16% % 6.3% 7.2% 7.2% 0.91 CMT Dec BUY ,341 9% % 5.2% 5.3% 5.3% 1.08 FCT Sep BUY ,017 11% % 5.4% 5.8% 6.1% 1.14 SPH REIT Aug HOLD ,643 8% % 5.3% 5.3% 5.6% 1.09 MCT Mar BUY ,549 14% % 5.4% 5.5% 5.6% 1.21 MAGIC Mar BUY ,327 15% % 6.2% 6.3% 6.4% 0.95 SGREIT Dec BUY ,647 12% % 6.5% 6.5% 6.6% % 5.6% 5.7% 5.8% 0.66 Industrial a-itrust Mar BUY ,056 9% % 5.4% 5.8% 6.3% 1.64 A-REIT Mar BUY ,676 12% % 6.0% 6.1% 6.1% 1.28 Cache Dec BUY % % 8.0% 7.5% 7.6% 0.85 ESR REIT Dec BUY % % 6.8% 7.1% 7.3% 0.83 FLT Sep BUY ,656 15% % 5.7% 6.0% 6.0% 1.10 MINT Mar BUY ,732 12% % 5.9% 6.1% 6.2% 1.45 MLT Mar BUY ,847 11% % 5.7% 5.8% 5.9% 1.24 SBREIT Dec BUY % % 8.4% 7.2% 7.2% % 6.3% 6.2% 6.4% 1.24 Hospitality ASCHT Mar BUY % % 6.5% 6.9% 6.9% 0.99 ART Dec BUY ,558 11% % 5.8% 6.1% 6.2% 0.84 CDREIT Dec BUY ,990 8% % 5.5% 6.0% 6.3% 1.04 FEHT Dec BUY ,326 1% % 5.7% 5.9% 6.2% 0.76 FHT Sep BUY ,442 20% % 6.4% 6.8% 7.1% 0.95 OUEHT Dec BUY ,499 15% % 6.2% 6.1% 6.4% % 5.9% 6.2% 6.3% 0.93 Healthcare P-Life Dec BUY ,748 12% % 4.5% 4.3% 4.3% 1.71 RHT Mar HOLD % % 7.3% 6.3% 6.6% 0.90 Others IREIT Dec BUY % % 7.6% 7.5% 7.6% 1.16 KDCREIT Dec BUY ,623 1% % 5.0% 5.4% 5.6% 1.56 Manulife US Dec BUY ,256 15% % 5.8% 6.5% 6.6% 1.24 REIT Sector 1.0% 5.7% 5.7% 5.8% 1.10 FY18/ 19F FY19/ 20F (x) Note: Prices used as of 14/12/17 Page 6

7 Singapore Developers Peer Comparisons Company FYE Mkt Cap Price 14/12/17 12-mth Target Price (S$ bn) (S$) Rcmd (S$) % (S$) Discount (%) Upside RNAV *Assumed P/RNAV P/NAV P/NAV (at TP) (x) (x) P/NBV Developers CapitaLand Dec BUY % % City Dev Dec BUY % % Frasers Centrepoint Sep BUY % % Ltd UOL Dec BUY % % Roxy Dec BUY % % Average Non-Covered Guocoland Dec na 0.66 UIC Dec na 0.77 Ho Bee Dec na 0.56 Wheelock Dec na 0.76 Wing Tai Jun na 0.53 Bukit Sembawang Dec na 1.20 United Engineers Dec na 0.85 Hiap Hoe Dec na 0.57 Hotel Properties Dec na 1.10 Oxley Holdings Dec na 1.82 Average na 0.78 Average sector 0.82 Note: Prices used as of 14 Dec-2017 Page 7

8 3. Developers Need to deliver on market expectations Key Points Developers to continue to landbank albeit more selectively Strong sell-through rates for projects in 2018 a key catalyst for developers to re-rate Top picks: City Developments Limited (CDL), UOL Group Strong performer in Singapore s property developers (measured by the FSTREH index) have been strong performers in 2017, supported by the rebounding property market. The FSTREH index is up by c.30% this year and we believe that improving macro factors (DBS economist has upgrade his forecast for Singapore s 2018 GDP growth to to 3.0%) will support higher transaction velocity and thus share prices of developers. Thus, we believe that developers shares will continue to remain strong on the back of solid transaction volumes, price gains and after a year of land-banking stronger sell-through rates when projects are launched for sale. These factors, in our view, will result in higher valuations going forward. Buoyant market conditions to support property counters. Transaction volumes and prices have historically been key drivers of developers stock prices and we saw a close corelation between developer s P/NAV and property prices measured by the property price index (PPI) and volumes. These macro factors have a fairly strong co-relation of 0.6x and 0.5x to developer valuations, respectively. With developers trading at 0.9x P/NAV currently, we believe that most of these macro factors have been priced into stock prices. Looking ahead, we believe that the next leg of growth will come mainly from stock-specific factors and broadly categorised into (i) developers delivering strong project sellthrough rates for existing and newly-landbanked sites, (ii) rising PPI, which will imply better margins and returns. Developers were the outperformers in (x) Singapore REITs (FSTREI Index) Straits Times Index (FSSTI Index) Singapore Developers (FSTREH) 0.90 Jan-2017 Feb-2017 Mar-2017 Apr-2017 May-2017 Jun-2017 Jul-2017 Aug-2017 Sep-2017 Oct-2017 Nov-2017 Page 8

9 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Industry Focus Developers P/NAV to volumes Units Sold 16,000 Volumes vs Developers valuation (x) ,000 12, ,000 8,000 B C D ,000 A E ,000 2, Volumes transacted (Primary and Secondary) (LHS) P/NAV (RHS) Source: URA, Bloomberg Finance L.P., DBS Bank Developers P/NAV to volumes Price Changes vs Developers valuation (%) Change (x) (5) B C D A E (10) 0.50 (15) - Price Changes (%) (LHS) P/NAV (RHS) Source: URA, Bloomberg Finance, DBS Bank Period Observations A 1Q01-1Q03 Developers prices / P/NAV declined by >40% as volumes tapered off due to SARS B 3Q03 1Q07 Multi-year bull run in prices and volumes, which correspondingly saw developer s P/NAV rise from a low of 0.7x to a peak of more than 2.0x C 2Q07-1Q09 Global Financial Crisis which saw volumes dry up and prices correct significantly. Developers shares corrected to multi-year lows D 3Q12 2Q15 A minimal correction in prices and volumes due to eight rounds of cooling measures. Developers shares corrected from >1.0x P/NAV to as low as 0.65x P/NAV E 1Q17 onwards Volumes started to move up in 2016 and 1H17, while prices have yet to do so. Developers P/NAV have re-rated close to their mean of 0.9x P/NAV. Source: URA, Bloomberg Finance L.P., DBS Bank Page 9

10 3.1 Riding the positive market momentum Property prices on a multi-year recovery trend; luxury end of the market to lead the recovery. We remain property bulls and continue to see higher transaction velocity and prices for the Singapore property market in We expect a price recovery to the tune of c.3%-5% per annum over the next two years. In the immediate term, flushed with c.s$7bn in proceeds from recent en-bloc transactions, close to c.3,500 displaced homeowners will be looking for a new home. These households are most likely to be looking at completed properties in the secondary market or public housing (HDB) and will be a key driver for the rise in transaction volumes in 1H18. Given that most of the projects that are sold en-bloc are completed close to years ago, we reckon that most of the home-owners are likely to be middle-age households in their late 40s-50s and thus unlikely to leverage up too much to purchase a new home. Thus, we believe that most are likely to downgrade to a smaller home and if possible, keep a sizable portion of their proceeds to fund retirement. The multiplier impact on transactions volumes will likely come from the second round of displaced home-owners (both HDB and secondary market) who will be transacting their homes in 1H18. Market absorption rate to remain at multi-year lows to drive prices higher. Supporting a rise in property prices is the fact that the unsold inventories are at a 16-year low of 1,820 units (from launched projects with sales permits as of 3Q17). While the supply that will enter the market in the medium term appears to be high at close to 20,000 units (c.5,000 units from sites sold at the GLS and 15,000 from en-bloc deals) and could potentially increase further with new supply from the 1H18 GLS, we do not believe that the additional supply is excessive. Assuming c.25,000-27,000 units in transaction volumes in , the supply/ transaction multiple remains at a low of c.2x, a level which we believe will support price increases. In addition, we see a near-term price increase coming from supply withdrawal because of en-bloc transactions and a low number of new unit completions in 1H Lastly, a wildcard in a further price acceleration will occur when the wave of buying from foreigners returns, especially for homes in the Core Central region (CCR). As of 9M17, we found that only c.6% of transactions are done by foreigners, down from an average of c.8%-10% over the past 10 years. Transaction value projected to rise by up to 5% in We are expecting transaction value to hit S$40.0b (+40% y-o-y) for FY2017F and S$42.2b for FY2018F (+5% y-o-y) and S$44.3b for FY2019F (+5% y-o-y) for the total private residential market, including both primary and secondary markets. With stronger buyer sentiment and an expected increase in transactions in the HDB market, we expect HDB prices to also stabilise and rise in 2018, which will be supportive of upgrader demand and higher prices for private homes in Transaction volume and value assumption 45,000 40,000 35,000 Units sold S$'m 80,000 70,000 60,000 We have assumed value of transactions to increase by c.5% in This is on the back of a 40% increase in ,000 25,000 20,000 15,000 50,000 40,000 30,000 10,000 20,000 5,000 10, F 2018F 2019F - Source: URA, DBS Bank Transaction Value (S$'m) RHS Volume Transaction Page 10

11 * Sales volume (units) % of foreign buying 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Industry Focus Spike in transaction volumes usually signal a change in pricing direction Price Changes vs Volumes 20 (%) (x) 16, , , ,000 A spike in transaction volumes typically signals a change in the direction of prices. An increase in volume typically precedes an increase in the price index by nine months to 1 year, with a high correlation of ,000 (5) 6,000 (10) 4,000 (15) 2,000 (20) Source: URA, DBS Bank Volumes transacted (Primary and Secondary) (LHS) Rate of Change of PPI - Foreign participation in the property market is still low Foreign participation in the property market remains low at c.6% of total transactions and typically will come in bigger numbers after a year of volume increases, resulting in significantly higher prices. Primary - LHS Sales on new launches - LHS Secondary - LHS Foreigners -LHS % of foreign buying - RHS Source: URA, DBS Bank Page 11

12 3.2 Majority of new land tenders awarded to local players Developers remain hungry for land despite investing close to S$22.3bn in the residential market. Land-hungry developers invested close to S$22.3bn to acquire land through the GLS and collective-sale market (en-bloc deals) in 2017, one of the most active years since Despite an active year, we expect developers to remain hungry for more land, given their constant need to re-stock dwindling inventory on their books. Developers will continue to look for opportunities in the pipeline of reportedly 40 more en-bloc prospects as well as various sites available through the GLS. Developers are pricing in a recovery in prices in Given intensive competition for land, margins are narrowing. Based on our estimates, developers net margins have fallen from an average of 20% (over ) ranging 18%-26% - to an average of 9%-15% from 2013 onwards. According to our assumptions, we estimate that average net margins could turn negative for a majority of projects that were awarded in 2H16-1H17 if currnet prices stay. As such, with most developers assuming an increase in launch prices when these projects come to the market sometime in 2018, there is an push factors driving up prices given higher break-even price levels. This is based on the assumption of a 10% net margin and current prices for newly launched projects in the vicinity. Profitability outlook still mixed. According to our base-case scenario of a two-tier market recovery in 2018 led by the luxury end of the residential market, we believe that there is a possibility that selected projects that were won in recent tenders could see losses until a more sustained recovery in prices is underway. Developers could also time their project launches, in order to capture rising buyer sentiment to maximise returns. Investment in Singapore residential market S$'m 12,000 10,000 8,000 6,000 4,000 2,000 Index Value Investment into land-banking in Singapore s residential market has reached a multi-year high, largely driven by the en-bloc market. We believe that there developers appetite to landbank still has legs, albeit more selectively GLS Enbloc PPI (RHS) 60 Source: URA, DBS Bank Average net margins (after tax) will be negative if prices stay flat Expectations of price recovery We estimate that margins have been compressing to sub-15% over vs an average of 20% Competitive land bids have brought margins to -8% for tenders awarded in 2017, implying that developers are projecting at least a 5%-10% increase in selling prices in the submarket in order to break even. *2017 margins are estimated using current price levels. Source: URA, DBS Bank Page 12

13 Singapore-listed and Singapore-based developers took the lion s share of land sites in Based on transactions in the GLS and en-bloc market made to date, local developers have been active in adding to their landbank in We found that more than 50% of number of land tenders has been awarded to developers listed on the SGX, followed by 17% of units to local unlisted developers. The remaining 33% was awarded to foreign developers (private or foreign-listed). Developers that have added more significantly to residential landbank in their books include the likes of listed companies like Oxley, City Developments, UOL, Singhaiyi, Keppel Land, and Wing Tai. New-to-market developers include HK-listed Logan Property Holdings, which has close to S$2.1bn in gross development value (GDV) in Singapore through two sites. The developer who won the largest land site is Sim Lian (privately held), who will be looking to launch up to 2,600 units (subject to approvals after a traffic study). The site itself has an estimated GDV of close to S$2.5bn. Take-up of new launches a data-point. The take-up rates of these new sites will be a key data-point to ascertain if the Singapore property market still has legs, especially when developers have priced in an implied increase in average per sqft (S$psf) price for most sites to break even. End-buyer of GLS / En-bloc projects in 4Q16/2017 (by units) 21,300 units yet to be launched as of Nov 17 End-buyer of GLS / En-bloc projects in 4Q16/2017 (by GDV) S$26bn in GDV Foreign Listed 19% Foreign Listed 18% Foreign Private 14% Local listed 50% Foreign Private 15% Local listed 51% Local Private 17% Local Private 16% Source: URA, media, DBS Bank Source: URA, media, DBS Bank Top 10 developers with largest estimated sellable resources (by attributable share) new sites only No Developer Number of Sites GFA (sqft) Estimated Units to be launched 1 Sim Lian 1 1,966,882 2,610 2,480 2 Oxley 5 1,581,185 2,099 2,101 3 Logan Property 2 1,566,851 2,001 2,436 4 Kingsford 1 1,388,098 1,842 2,206 5 City Developments 2 1,252,601 1,509 1,873 6 UOL 3 864,118 1,144 1,213 7 Chip Eng Seng 2 659, ,122 8 Allgreen 3 701, FCL 1 551, , Keppel Land / Wing Tai 1 462, GDV (S$ m) Source: URA, media reports, DBS Bank Page 13

14 3.3 Which developer has the largest landbank? Market share of major listed developers has increased. Based on our estimates, as of 3Q17, amongst the listed developers (covered by DBS and other selected names), those with significant exposure to the Singapore residential market and have the most unsold inventory are the likes of City Development, MCL Land, Allgreen, Oxley, and UOL-UIC. MCL Land and City Developments have close to 2,000 units each in unsold iinventory on the books (inclusive of launched projects and landbanked projects). However, estimated GDV for both developers is close to S$2.5bn and S$4.0bn, respectively. This is mainly due to the number of luxury projects that CDL has in its book. Oxley has been actively land-banking and will be launching close to 1,136 units next year (attributable units through joint ventures) with GDV of S$1.5bn. UOL, together with UIC, has an estimated GDV of S$1.8bn in 1,290 units. Niche luxury-end developments GuocoLand also has close to 500 units in the market for sale worth about S$1.73bn. Roxy Pacific could also potentially lock in substantial sales of close to S$0.6bn if the planned sales across the group s seven projects do well when launched in Estimated developer s unsold inventory (existing and newly landbanked) by market segment 2,500 Units $4,019 $4,500 $4,000 2,000 $3,500 1,500 $2,458 $3,000 $2,500 1, $1,429 $1,545 $1,326 $990 $854 $1,088 $1,730 $646 $530 $298 $230 $2,000 $1,500 $1,000 $500 - MCL Land CDL Oxley Allgreen FCL UOL UIC Keppel Land Guocoland Roxy Wingtai CapitaLand Wheelock OCR (units) CCR (units) RCR (units) GDV (S$'m) $- Source: URA, companies, DBS Bank Estimated developers exposure by market segment (to update) Company SG Resi SG Commercial Overseas Total Covered by DBS % % % % CapitaLand 2% 42% 58% 100% City Dev 31% 38% 31% 100% Frasers Centrepoint Ltd 5% 50% 45% 100% UOL 19% 66% 15% 100% Roxy Pacific 21% 25% 54% 100% Non-Covered GuocoLand 23% 45% 32% 100% Wing Tai 17% 30% 53% 100% UIC 40% 45% 5% 100% Wheelock 25% 39% 36% 100% Bukit Sembawang 99% 1% 0% 100% Oxley Holdings 45% 20% 35% 100% Source: URA, Bloomberg Finance, companies, DBS Bank Page 14

15 Summary of upcoming sites in the GLS and En-bloc deals Site Projects Awarded Potential Launch Date Region Developer Mths from tender Award GFA (sqft) Existing units Est new units GLS n.a. Jiak Kim Street 2019 CCR Frasers Centrepoint Ltd n.a. Fourth Avenue 2019 OCR Allgreen Aug-17 Serangoon North Avenue OCR Keppel-Wing Tai Jul-17 Woodleigh Lane 3Q18 RCR Chip Eng Seng Jun-17 Upper Serangoon Road 2Q18 OCR SPH Jun-17 Lorong 1 Realty Park 2Q18 OCR Fantasia Investment May-17 Stirling Road 2Q18 RCR Logan Property & ,110 - Nanshan Group May-17 Tampines Avenue 10 1Q18 OCR City Developments Apr-17 Toh Tuck Road 1Q18 OCR SP Setia Feb-17 West Coast Vale 1Q18 OCR China Construction Jan-17 Perumal Road 1Q18 RCR Low Kheng Huat Dec-16 Margaret Drive 1Q18 RCR MCL Land Apr-16 Jalan Kandis 4Q17 OCR Tuan Sing Holdings Total GLS ,670 - En-bloc Dec-17 Royalville 2017 OCR Allgreen Dec-17 Crystal Tower 2018 OCR Allgreen Nov-17 How Sun Park 2019 OCR Singhaiyi JV Nov-17 Mayfair Garden 2019 OCR Oxley Nov-17 Tai Wah Building 2019 CCR Lucrum Capital (PE firm) Nov-17 Casa Contendere 2019 CCR Tee Land (private treaty) Oct-17 Dunearn Court 2019 RCR Roxy-Pacific Holdings Oct-17 Florence Regency 2019 RCR Logan Property ,446 4 Oct-17 Changi Gardens 2019 OCR Chip Eng Seng Oct-17 Normanton Park 2019 RCR Kingsford Huray ,842 4 Development Oct-17 Amber Park 2019 RCR City Dev and Hong Realty Sep-17 Nanak Mansions 4Q18 RCR UOL / Kheng Leong Sep-17 Jervois Garden 4Q18 RCR SC Global Sep-17 Sun Rosier 4Q18 RCR Singhaiyi JV Sep-17 Seraya Crescent 4Q18 RCR Singhaiyi JV Aug-17 Tampines Court 3Q18 OCR Sim Lian ,610 5 Jul-17 Serangoon Ville 3Q18 RCR Oxley/Lian Beng and ,103 5 partners Jul-17 The Albraca 3Q18 RCR Sustained Land Jul-17 Lotus@Pasir Panjang 3Q18 OCR Oxley Jun-17 1 Draycott Park 3Q18 CCR Selangor Dredging Jun-17 Eunosville 3Q18 OCR MCL Land ,399 4 May-17 Rio Casa 2Q18 OCR Oxley-Lian Beng ,472 5 May-17 Goh & Goh Building 2Q18 OCR BBR Holdings May Upper East Coast 2Q18 OCR Oxley May-17 One Tree Hill Gardens 2Q18 CCR Lum Chang Group May Amber road 2Q18 RCR UOL Group Jan-17 8 Hullet Road 1Q18 CCR Lian Huat Group Nov Grange Road 1Q18 CCR Roxy-Pacific Holdings Nov-16 3 Cuscaden Walk 1Q18 CCR Sustained Land Nov-16 Raintree Gardens 1Q18 RCR UIC / UOL 50:50 JV Oct-16 Harbour View Gardens 1Q18 OCR Roxy-Pacific Holdings Aug-16 Shunfu Ville 1Q18 OCR Qingjian Realty ,150 3 Total Enbloc ,605 15,639 4 Total GLS and Enbloc ,605 22,309 - Source: URA, DBS Bank Multiple (x) Page 15

16 Summary of upcoming sites in the GLS and En-bloc deals (continued) Site Awarded Projects Devt Cost GDV Average Quantum Profit margin Est Breakeven Mkt Comps Selling prices Premium to comps S$'m S$'m (S$'m) (%) S$ psf S$ psf S$ psf (%) GLS n.a. Jiak Kim Street 1,231 1, % 2,233 2,400 2,550 6% n.a. Fourth Avenue % 2,040 1,600 2,200 38% Aug-17 Serangoon North Avenue % 1,699 1,400 1,500 7% Jul-17 Woodleigh Lane 1,017 1, % 1,700 1,400 1,850 32% Jun-17 Upper Serangoon Road 967 1, % 1,750 1,400 1,850 32% Jun-17 Lorong 1 Realty Park % 946 1,100 1,200 9% May-17 Stirling Road 1,480 1, % 1,521 1,650 1,800 9% May-17 Tampines Avenue % 985 1,200 1,300 8% Apr-17 Toh Tuck Road % 1,359 1,300 1,550 19% Feb-17 West Coast Vale % 1,012 1,250 1,300 4% Jan-17 Perumal Road % 1,421 1,400 1,600 14% Dec-16 Margaret Drive % 1,418 1,650 1,800 9% Apr-16 Jalan Kandis % 901 1,050 1,200 14% Total/Average GLS 8,616 9, % 1,337 1,345 1,541 14% Enbloc Dec-17 Royalville % 2,460 2,400 2,800 17% Dec-17 Crystal Tower % 2,340 2,400 2,800 17% Nov-17 How Sun Park % 1,500 1,400 1,700 21% Nov-17 Mayfair Garden % 1,694 1,500 1,897 26% Nov-17 Tai Wah Building % 2,582 2,400 2,892 21% Nov-17 Casa Contendere % 2,088 1,800 2,339 30% Oct-17 Dunearn Court % 1,800 1,850 2,016 9% Oct-17 Florence Regency 1,408 1, % 1,292 1,350 1,447 7% Oct-17 Changi Gardens % 1,338 1,250 1,499 20% Oct-17 Normanton Park 1,969 2, % 1,419 1,350 1,589 18% Oct-17 Amber Park 1,176 1, % 1,965 1,700 2,201 29% Sep-17 Nanak Mansions % 1,879 1,800 2,105 17% Sep-17 Jervois Garden % 1,824 1,950 2,042 5% Sep-17 Sun Rosier % 1,775 1,400 1,988 42% Sep-17 Seraya Crescent % 1,381 1,250 1,546 24% Aug-17 Tampines Court 2,214 2, % 1,126 1,250 1,261 1% Jul-17 Serangoon Ville 1,068 1, % 1,285 1,300 1,439 11% Jul-17 The Albraca % 1,859 1,750 2,083 19% Jul-17 Lotus@Pasir Panjang % 1,414 1,500 1,650 10% Jun-17 1 Draycott Park % 2,238 2,200 2,506 14% Jun-17 Eunosville 1,434 1, % 1,359 1,250 1,522 22% May-17 Rio Casa 1,282 1, % 1,156 1,300 1,294 0% May-17 Goh & Goh Building % 1,708 1,800 1,913 6% May Upper East Coast % 989 1,300 1,500 15% May-17 One Tree Hill Gardens % 1,819 2,200 2,037-7% May Amber road % 1,513 1,700 1,695 0% Jan-17 8 Hullet Road % 2,523 2,200 2,826 28% Nov Grange Road % 1,914 2,400 2,400 0% Nov-16 3 Cuscaden Walk % 2,276 2,400 2,549 6% Nov-16 Raintree Gardens % 1,247 1,400 1,396 0% Oct-16 Harbour View Gardens % 1,222 1,400 1,369-2% Aug-16 Shunfu Ville 1,371 1, % 1,197 1,400 1,341-4% Total/Average Enbloc 16,735 18, % 1,646 1,658 1,868 13% Total/Average 25,350 28, % 1,492 1,502 1,705 14% Source: URA, DBS Bank Page 16

17 60% of launches will be from en-bloc sites in 1H18. Developers have been actively restocking residential inventories in We believe they will continue to be aggressive but will be more selective going into With more than 22,000 new units expected to be hit the market in across c.40 land sites, buyers are spoilt for choice. The timing of the launches is likely to be skewed towards the 2H18-1H19. Assuming a 12- and 15-month timeframe from site award to launch, we estimate that close to 16,000 of new units will be launched over 2018, of which 60% will come from redeveloped en-bloc sites. Given that these sites are located in mature estates, we believe there will be strong buying demand. Likely supply pipeline (by type of sale) 8,000 7,000 Units Potential risk? The risk for developers land-banking at the current juncture will be that if take-up rates for existing projects are poor, they will then face increased pressure to reprice units lower. With the additional buyer stamp duties (ABSD) on land purchase and potential extension charges (for en-bloc sites) unlikely to be tweaked in our view, these charges will start to bite when the deadline approaches 5-7 years after taking over the sites. With projected margins already thin at <12% (based on target launch prices) for most of the projects to be launched next year, a slow sell-through rate implies that the risk of a potential writeoff in project costs will rise in the medium term. Based on estimates, close to 22,000 units will be introduced to the market over ,000 5,000 4,000 2,121 5,409 5,599 3,000 1,920 2,000 1,000-2,670 1,985 1, Q18 2Q18 3Q18 4Q GLS Enbloc Source: URA, DBS Bank Likely supply pipeline (by area) Units 8,000 7,000 6,000 Most of the supply will enter the market in 3Q18, with most of the units in the rest of central (RCR region). 5,000 4,000 3,000 2,000 1,000-1Q18 2Q18 3Q18 4Q OCR RCR CCR Source: URA, DBS Bank Page 17

18 No Working Person Below 1k 1k - 1.9k 2k - 2.9k 3k - 3.9k 4k - 4.9k 5k - 5.9k 6k - 6.9k 7-7.9k 8k - 8.9k 9k - 9.9k 10k k 11k k 12k k 13k k 14k k 15k k 17.5k k 20k & above Industry Focus 3.4 Developer strategy: Calibrating unit sizes to maintain affordability Singapore household balance sheets have improved. According to data from the Singapore Department of Statistics, income distribution of household income has flattened over time and shifted to the right, with a more significant shift post-2007, as shown in the figure below. According to our research, between , households that are in the 80 th percentile moved progressively from the S$7-7.9k income bracket (2000) to the S$9k-9.9k (2007) and S$ k (2016) bracket. We note that the percentage of households earning >S$20k/month has grown significantly from 2000 to 2016, implying that household income can support higher property prices going forward. The growing number of resident households in Singapore is also contributing to the underlying demand for homes (both public and private). We note that the total number have grown to c.1.2m in 2016, with close to 300k households earning above the existing income limit to qualify for public housing (HDB flats and executive condominiums or ECs). This means that majority of the new households formed by young professionals will apply for HDB flats and ECs. The number of households in the top 20 th percentile income range have also doubled, from c.182k in 2000 to 276k in 2016, 28% higher than in Income distribution have shifted to the right Monthly household income (resident households) th Percentile (2000) 80th Percentile (2007) 80th Percentile (2016) Source: Singstat, DBS Bank Household affordability Households (Percentile) Households (Percentile) Households (Percentile) <6k 625,928 68% 633,057 66% 509,231 46% 6k - 6.9k 61,312 75% 73,086 66% 73,289 46% 7-7.9k 46,670 80% 61,264 71% 64,444 51% 8k - 8.9k 36,604 84% 50,516 76% 61,916 56% 9k - 9.9k 28,368 87% 40,842 80% 58,126 61% 10k k 21,962 90% 35,468 83% 58,126 65% HDB cap 11k k 16,472 92% 27,945 86% 48,017 69% 12k k 13,727 93% 20,421 88% 44,226 73% 13k k 10,066 94% 20,421 90% 37,908 76% EC cap 14k k 8,236 95% 15,047 91% 32,854 78% 15k k 14,642 97% 27,945 94% 69,498 84% 17.5k k 9,151 98% 18,272 95% 50,544 88% 20k & above 21, % 50, % 156, % Total Households 915,100 1,074,800 1,264,864 Top 20 th Percentile 181, , ,278 Source: Singstat, DBS Bank Page 18

19 Households are upgrading to smaller spaces. Developers have kept the price quantum fairly constant over the past few years and average transaction quantum has remained stable at c.s$1.5m since This has been on the back of shrinking house sizes; in 2001, it averaged 1,400 sqft but as of 2016, is down by close to 40% to 1,000 sqft. If developers want to keep the quantum stable going forward, the quantum will have to decline further. The average transaction quantum of homes in the Rest of Central Region (RCR) and Outside of Central Region (OCR) remained stable at c.s$ m while average sizes have declined c.20% to c.900 sqft. Therefore, given transactions remained flat and mortgage commitments stable, homebuyers still viewed new homes as being affordable and thus, continued to upgrade to new, albeit smaller spaces. Average transaction quantum has remained fairly stable since S$'m Mkt average OCR CCR RCR Source: URA, DBS Bank Average quantum (island) for new sales declining towards 800 sqft 1,800 Sqft 1,600 1,400 1,200 1, ,167 1,109 1, , Mkt average OCR CCR RCR Source: URA, DBS Bank Page 19

20 Price-to-income ratio has remained stable in Singapore and has room to rise. Singapore s price-to-income ratio has remained fairly consistent over the past few years at a range of x. According to Jones Lang LaSalle, Singapore s housing affordability has improved from 7.3x in 2010 to 4.8x in This compares favourably with other regional cities like Hong Kong, London, San Francisco, Tokyo, and Sydney, which range between x. Using the price-to-income ratio for the 80 th income percentile and 5-room HDB dwellers as proxies for upgrader demand show that the ratio is stable at 7.3x and 9.3x, respectively, similar to levels in The ratio stands at 5.6x for condominium dwellers, one of the lowest since Even if prices increase by a 5% CAGR over , based on 2016 income levels, the price-to-income rations remain reasonable. While the regional comparison shows there is room for property prices in Singapore to rise, we note that the current price-to-income ratio is also close to 2003 levels, implying there is still scope for developers to raise prices before they become unaffordable. This is likely to come at the expense of average sizes. Home price-to-income ratio ( ) Years Singapore London San Francisco Toyko Sydney Hong Kong Singapore is the only global city where the price-to-income ratio declined while other cities increased. Source: JLL, DBS Bank Singapore s price-to-income ratio (x) Forecast F 2018F 2019F 80th percentile HDB 5rm Condo As of 2016, the price-to-income ratio based on 80 th income percentile and 5-room HDB dwellers stood at 7.3x and 9.3x, respectively. The ratio was at 5.6x for condominium dwellers. This is not excessive compared with historical levels. Even if prices increase by a 5% CAGR over , based on 2016 income levels, the price-to-income ratio remain reasonable. Source: URA, DBS Bank Page 20

21 3.5 Valuations and our picks Strong sell-through rate a catalyst to re-rate. Developers shares have done well year-to-date (YTD) up close to 25%, which we believe prices in a lot of the improved investor sentiment in the property sector. Developers who have a higher exposure or have added to the Singapore residential land-bank did better. The next leg of re-rating will likely be stock-specific and driven mainly by developers ability to achieve strong sell-through rates when projects are launched in In addition, successful land-banking activities will also drive up RNAV expectations going forward. In that aspect, most listed developers have added to inventories in 2017, with City Dev, UOL, Oxley, and Roxy Pacific making significant additions. Target 1x P/NAV. Even at an average P/NAV of 0.9x, -0.5x standard deviation (SD), we believe Singaporean developers can continue to do well in Sentiment should remain positive on the back of expected robust volumes in the Singapore property market which will lead to a price increase in We believe developers can potentially reach +1 SD of 1x P/NAV, implying a 0.9x P/RNAV. UIC. Its recently purchased land sites (Raintree Gardens and sites along Meyer/Amber Road) from the en-bloc market will likely see strong buyer interest upon their launch, which we believe will be re-rating catalysts for the stock. In addition, the group s hotel arm, Pan Pacific, is expected to see stronger RevPAR on the back of abating supply risk in Singapore and as business travel recovers in Asia. We also introduce mid-cap developers: Roxy Pacific (Initiate BUY, TP 0.69) We project strong sell-through rates for Roxy Pacific s seven projects in Singapore, numbering <400 units which could generate more than S$0.5bn in pre-sales. The group has been building up its recurring income portfolio which will also contribute positively from 2018 onwards. We initiate BUY with a TP of S$0.69, which is based on a 30% discount to our RNAV. Key Risks Our picks are: City Developments (BUY, TP S$14.03) We maintain our BUY call on City Dev with a street high TP of S$14.03 mainly on re-pegging the valuation on M&C to NAV. With the Singapore property market in the nascent stages of an upturn, City Dev is largely seen as a key proxy to upward trends in the Singapore residential market and has historically traded up to x P/NAV, which our TP implies. The catalyst will come from the robust pipeline of projects to be launched in 2018 and beyond. On that front, the first to hit the market will be New Futura, 124-unit freehold development at Leonie Hill, District 9 in 1Q18, and an 861-unit suburban condominium in Tampines Avenue 10. City Dev is also preparing for the soft launch of South Beach Residence (190 units) in 1H18. UOL Group (BUY, TP S$10.15) We maintain our BUY rating on UOL Group, now trading at an attractive valuation of c.0.8x P/NAV with the consolidation of Higher interest rates and elevated vacancy rate could dampen price increase momentum. With global interest rates expected to rise in , a key uncertainty will be the pace of increase negatively impacting homebuyers purchasing ability. The high vacancy rates of c.8.4% could also cap further price increases especially when investors are unable to find tenants and thus, have to take on the additional mortgage burden. Government intervention only when property price rises at an unabated pace. The government has kept a close watch on the robust demand in the collective sales market (en-bloc) which has become an alternative means for developers to land-bank. While the government is wary of a potential bubble in land prices, we believe the government is unlikely to introduce tightening measures at this point unless the property price momentum rises at an unabated pace. However, indirect measures could be implemented to limit overleverage in the system, such as introducing more supply in government land sales (GLS) or curbing bank lending. Page 21

22 Developers historical P/NAV and discount to RNAV Source: URA, Bloomberg Finance L.P., DBS Bank Developer performance in 2017 Last Close Mkt Cap P/NAV BV/Share YTD Price (1M) Price (3M) Price (6M) Price (1Yr) S$ S$ m (x) S$ (%) (%) (%) (%) (%) CapitaLand Limited , % -7% -3% 13% -3% City Developments Limited , % 2% 12% 43% 6% UOL Group , % 6% 19% 44% 6% Frasers Centrepoint Limited , % -5% 11% 34% -2% United Industrial Corp , % 2% 6% 23% 7% Yanlord Land Group , % -8% -15% 16% -13% Wheelock Properties (S) Ltd , % 4% 2% 27% 2% GuocoLand Limited , % -10% 13% 11% -8% Oxley Holdings Ltd , % 17% 19% 52% 21% Bukit Sembawang Estates Ltd , % -7% 0% 37% -6% Ho Bee Land Ltd , % 4% 5% 18% 6% Wing Tai Holdings Ltd , % 2% 12% 33% -1% Fragrance Group Ltd , % 1% -4% 5% 1% Hong Fok Group Ltd % 11% 13% 34% 7% Roxy-Pacific Holdings % -2% 1% 25% -3% Bonvest Holdings Ltd % 1% 7% 13% 0% Tuan Sing Holdings % 32% 47% 60% 21% Centurion Corp Ltd % 3% 15% 69% 7% Hiap Hoe Ltd % 11% 24% 23% 10% Heeton Holdings Ltd % 16% 21% 35% 14% Sing Holdings Ltd % 7% 24% 40% 0% United Engineers Ltd , % -4% -8% 1% -4% Metro Holdings % -8% -3% 12% -15% Aspial Corp Ltd % 0% -12% -7% 2% Source: URA, Bloomberg Finance L.P., DBS Bank Page 22

23 4. Singapore REITs: Climbing the wall of worry again Key Assertions REITs to rally again on the back of expectations of a syncronised global growth Yield spreads to tighten to 3% on expected cyclical upturn in spot rents Focus on REITs that offer strong DPU growth and/or value plays Large-cap picks: A-REIT, KREIT, MLT, MAGIC, Suntec Mid-cap picks: CDREIT, FCT, FHT 4.1 Interest rates a yearly concern but mitigating factors in place S-REITs confound critics for the third year running. At the start of 2017, like the previous three years, there were fears that S- REITs would underperform given expectations of rising interest rates. Although the US Federal Reserve has increased interest rates three times in 2017, S-REITs continued to outperform, rising c.25% (inclusive of distributions) compared with the Strait Times Index (STI) which climbed c.23%. The rally in S- REITs was largely attributed to expectations of an upturn in spot rents across various property segments in In addition, S-REITs offered attractive valuations at the start of 2017, with yield spreads standing at 4.0% above the historical average spread of 3.8% with S-REITs trading at a discount to book of 0.95x. However, as expected, S-REITs did lag the developers index which jumped by c.30%. Three rate hikes in 2018 but SREITs to climb the wall of worry again on expected recovery in various subsectors. For 2018, similar to consensus expectations, our DBS economists expect three US rate hikes, with the 10-year Singapore bond yield to rise from around 2.1% currently to 2.5%. We expect S-REITs to climb the wall of worry again given increased investor confidence that growth returning into the Singapore property market will drive an upturn in spot rents across the office, hotel, and industrial segments. A sweet combination of easing supply pressures and a pick-up in demand on the back of a synchronised upturn in global growth as judged by our DBS economists. The growth in topline, aided by previously announced acquisitions in 2017, should also provide a buffer. Impact of rising interest rates on DPU tempered due to hedges that have been put in place. Like the last few years, investors have been concerned about rising interest rates and the impact on DPU. However, as explained in our prior reports, S-REITs in general have hedged 75-85% of their debt into fixed rates and have only 17%, 18%, and 1% of total debt up for refinancing over 2018, 2019, and 2020, respectively; as such, the impact is measured. Furthermore, the impact from a rise in interest rates may also be mitigated by REITs that have exposure to European and Japanese assets. They have some flexibility in seeking more EUR or JPY debt which lowers the overall borrowing costs. We estimate that a 1% rise in interest rates beyond the increase in borrowings costs we have already assumed, will have a 1.9% and 1.8% impact on distributions in 2018 and 2019, respectively. Performance of Singapore REITs vs Singapore developers and Straits Times Index (total return including dividends) 40% 35% 30% 25% 20% 15% 10% 5% 0% Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 STI SREIT Developers Page 23

24 Potential impact on DPU of a 1% increase in interest rates REIT Fixed-rate debt (%) Current cost of debt Percentage of debt due for refinancing Change in DPU with 1% increase in interest rates FY18F FY19F FY18F FY19F Ascendas Hospitality Trust % 19% 39% -1.7% -1.7% Ascendas India Trust % 19% 39% -0.6% -0.9% Ascendas REIT % 19% 39% -1.6% -1.5% Ascott Residence Trust % 22% 15% -1.6% -1.5% CDL Hospitality Trusts % 12% 4% -4.3% -4.1% Cache Logistics Trust % 28% 40% -2.4% -2.4% ESR-REIT % 28% 40% -0.6% -0.5% CapitaLand Commercial Trust* % 47% 13% -1.7% -1.7% CapitaLand Retail China Trust % 28% 40% -4.5% -4.1% CapitaLand Mall Trust* % 51% 18% -0.9% -0.8% Far East Hospitality Trust % 16% 15% -6.8% -6.0% Frasers Centrepoint Trust % 47% 13% -3.1% -2.9% Frasers Commercial Trust % 29% 13% -1.9% -1.6% Frasers Hospitality Trust % 16% 70% -2.1% -2.0% Frasers Logistics & Industrial Trust % 47% 13% -1.8% -1.7% IREIT Global % 47% 13% -0.8% -0.8% Keppel DC REIT % 16% 70% -2.7% -2.5% Keppel REIT* % 0% 29% -3.2% -2.8% Mapletree Commercial Trust % 11% 49% -1.9% -1.9% Mapletree Greater China Commercial Trust % 11% 49% -2.9% -2.9% Mapletree Industrial Trust % 13% 22% -1.2% -1.4% Mapletree Logistics Trust % 14% 24% -1.0% -1.4% Manulife US REIT % 14% 24% 0.0% 0.0% OUE Commercial REIT % 14% 24% -1.4% -1.4% OUE Hospitality Trust % 14% 24% -1.6% -1.4% Parkway Life REIT % 0% 23% -1.6% -1.6% RHT Health Trust % 35% 0% -2.8% -1.9% Soilbuild Business Space REIT % 34% 31% -3.5% -3.4% SPH REIT % 0% 29% -1.4% -0.4% Starhill Global REIT % 73% 0% -0.1% -0.1% Suntec REIT* % 38% 37% -4.5% -4.0% Total S-REIT Debt % 17% 18% -1.9% -1.8% *includes debt at associate level Page 24

25 S-REIT debt maturity profile Debt Expiry Profile S-REIT debt by sector Source: Bloomberg Finance L.P, DBS Bank Source: Bloomberg Finance LLP, DBS Bank Debt maturity profile for individual S-REITs (%) REIT Total Debt (S$bn) >2022 AIMS AMP Capital Industrial REIT % 39% 15% 18% 9% 0% Ascendas Hospitality Trust % 0% 0% 0% 21% 62% Ascendas India Trust % 17% 0% 31% 10% 65% Ascendas REIT % 15% 0% 6% 10% 63% Ascott Residence Trust % 4% 0% 23% 21% 84% Cache Logistics Trust % 40% 0% 20% 0% 32% ESR-REIT % 21% 0% 5% 0% 47% CapitaLand Commercial Trust % 18% 0% 24% 3% 70% CapitaLand Mall Trust % 15% 0% 13% 6% 69% CapitaLand Retail China Trust % 18% 0% 20% 10% 77% CDL Hospitality Trusts % 18% 0% 22% 0% 30% Far East Hospitality Trust % 13% 0% 28% 13% 58% First REIT % 20% 0% 0% 0% 44% Frasers Centrepoint Trust % 15% 0% 33% 4% 66% Frasers Commercial Trust % 21% 0% 20% 11% 55% Frasers Hospitality Trust % 70% 0% 0% 15% 15% Frasers Logistics & Industrial Trust % 29% 0% 43% 0% 71% IREIT Global % 49% 0% 0% 0% 41% Keppel REIT % 22% 0% 20% 24% 65% Keppel DC REIT % 24% 0% 23% 15% 62% Manulife US REIT % 23% 0% 26% 36% 77% Mapletree Commercial Trust % 11% 0% 19% 19% 89% Mapletree Greater China Commercial Trust % 16% 16% 22% 24% 68% Mapletree Industrial Trust % 16% 0% 8% 9% 76% Mapletree Logistics Trust % 9% 0% 16% 13% 87% OUE Commercial REIT % 0% 0% 0% 49% 65% OUE Hospitality Trust % 31% 0% 0% 0% 34% Parkway Life REIT % 29% 0% 20% 22% 71% Religare Health Trust % 0% 0% 0% 0% 27% Soilbuild Business Space REIT % 8% 0% 18% 0% 61% SPH REIT % 15% 0% 15% 0% 48% Suntec REIT % 27% 0% 15% 24% 53% Viva Industrial Trust % 0% 0% 27% 11% 80% Starhill Global REIT % 9% 0% 32% 34% 85% Total S-REIT Debt % 18.1% 1.1% 16.7% 13.9% 63.7% Source: Various REITs, DBS Bank Page 25

26 4.2 Growth returns Oversupply over the past three years. Over the past few years, the office, retail, industrial, and hotel segments have been in an oversupply position due to the large jump in supply following the release of land 5-6 years ago when spot rents were rising rapidly, impacting Singapore s global competitiveness. Consequently, spot rents have been falling, resulting in negative rental reversions and pressure on occupancies in the preceding 2-3 years. This, in turn, saw S- REITx delivering flat to declining DPUs. Singaporean s spending over S$24bn overseas, may finally see a rebound in 2H18. Growth in DPU resumes. With headwinds to S-REITs easing, we believe 2018 will mark the resumption of DPU growth following a few years of flat or falling DPUs. For 2018, we project DPU growth of c.2% for the SREIT sector. The growth in DPU is also supported by the acquisitions announced in Supply pressures easing with demand set to pick up. However, heading into 2018, supply pressure should ease for the office, industrial, and hotel segments. The only exception is the retail sector which will experience another jump in supply once Jewel is completed in Thereafter, new retail supply will drop off. In conjunction with falling new supply, the outlook on the demand side is brighter compared to the last few years. With the pick-up in manufacturing seen in 1H17 following through to the services sector, our DBS economists forecast Singapore s 2017 GDP growth to exceed 3%. The positive momentum from 2017 should spill over to 2018, which is also a year that our DBS economists expect will coincide with a synchronised pick up in global GDP growth. This bodes well for demand for office and industrial space as well as a rise in higher-yielding corporate travellers. Retail spend, which has been sluggish due to an uncertain economic environment, competition from e-commerce, and The sector with the strongest DPU growth would be the hospitality sector where we project 5% DPU growth, followed by the retail sector at c.2% largely boosted by FCT which should benefit from the completion of the AEI at Northpoint. Excluding FCT (+6%), the retail sector should deliver around 1% growth in DPU. The industrial sector would likely register the third-fastest DPU growth at 2%, but there is a large dispersion with declines recorded by REITs such as Soilbuild (- 14%) and Cache Logistics (-6%) offset by strong growth from Ascendas India Trust (+7%) and ESR-REIT (+11%). The larger industrials REITs (AREIT, MLT, and MINT) should deliver steady 1-3% growth. Finally, office REITS are expected to deliver flat DPU, owing to capital distribution tempering the negative rental reversions as spot rents, while recovering, would not have caught up with expiring rents. Industrial space to see a drop in supply in ,500 2,000 1,500 1, ' sqm Supply Demand F 2018F 2019F Supply of industrial space remains elevated in 2017 but will drop close to 50% from 2018 onwards That said, most supply is still coming from the warehouse and factory segment and will need time to be absorbed The sector with the least supply pressure will be business parks, which will have minimal supply being completed in the next few years Source: JTC, URA, DBS Bank Page 26

27 Industry Focus Moderating supply in office space from 2018 onwards 3,000 2,500 2,000 1,500 '000 sqft Declining supply Supply in office space in downtown CBD will fall significantly from , which bodes well for rents in the medium term 1, Source: URA, DBS Bank Easing supply pressures in the hospitality sector Rooms 75,000 70,000 65,000 60,000 55,000 55,018 High new supply period 4% 7% 2,231 4,237 4% 2,032 4% 2,517 Moderating new supply 2% 1% 2% 1, ,139 After a period of high supply between 2014 and 2017, we expect supply to moderate 50,000 45, F 2018F 2019F 2020F Hotel rooms Expected net additions Source: STB, DBS Bank Services Producing Industries to become a key driver of Singapore s GDP growth Following a pick-up in manufacturing in early 2017, DBS economists expect the positive momentum to flow through to the services sector. In 2018, services will be the main driver of Singapore s GDP growth; this sector is, in turn, the main industry that drives demand for offices Source: CEIC, DBS Bank Page 27

28 Green shoots with a rise in employment in the services industry Thousands Source: CEIC, DBS Bank Improvement in cumulative number of employed in the services industry M 6M 9M 12M In the first nine months of 2017, we saw some evidence of green shoots, with 31,900 workers added to the workforce Hospitality REITs to deliver the strongest YoY DPU growth 6% 5% 3% 3% 4% 4% 2% 2% 2% 1% 1% 2% 2% 2% 1% 0% -2% -4% -6% -8% -10% FY16/17F FY17/18F FY18/19F FY19/20F Source: Various REITs, DBS Bank estimates 2% 1% 0% 0% 0% -1% -1% -1% -1% -1% -1% -3% -5% -6% -5% -8% Office Retail Commercial Industrial Hotel Healthcare SREIT average Selected S-REITs with strong growth profile REIT Sector Sector Growth FY17-18F DPU growth Growth driver FCT Retail 2.0% 5.9% Completion of Northpoint AEI AIT Industrial 1.7% 7.1% CDREIT Hospitality 5.4% 10.4% New developments and acquisitions in the previous year and strong rental reversions Boost from acquisitions in the previous year and recovery in the Singapore hospitality market KDCREIT Data centre (industrial) 1.7% 9.1% Acquisition of data centres MUST Office (USA) 1.7% 11.8% Improvement in the US office market and the previous year s acquisitions Source: Various REITs, DBS Bank estimates Page 28

29 4.3 Acquisitions expected to supplement growth Slowdown in acquisitions for the second consecutive year. As we had predicted at the start of 2017, the high cost of equity constrained SREITs ability to raise capital to fund acquisitions, with total announced acquisitions for 2017 dropping 1% to S$6.4bn from the 5.1% decline in The most active sector in 2017 was office (S$3.6bn), thanks to the acquisition of Asia Square Tower 2 (AST2) by CCT (S$2.1bn). This is followed by industrial (S$1.3bn), led by MLT s purchase of Mapletree Logistics Hub Tsing Yi (S$0.8bn) in Hong Kong from its sponsor. The retail and hospitality sectors purchased assets worth S$731m and S$653m, respectively; while the healthcare sector has been muted. In terms of country allocation, the focus shifted out of Singapore. 63% of total acquisitions in 2017, worth S$3.8bn, were in overseas markets as compared to 42% in Local acquisitions made up the remaining 37% (worth S$2.2bn) and was almost entirely contributed by one transaction, AST2 at S$2.1bn. Australia remains a popular destination; acquisitions totalled S$1.4bn with Melbourne a key destination as KREIT and Suntec bought Grade A or Premium Grade offices worth S$362m and S$447m (50% interest), respectively. FHT also purchased Novotel Melbourne for $256m. Other notable overseas acquisitions include: (1) AIT s purchase of Avance Business Hub (S$113m) and warehouse portfolio (S$112.5) in Hyderabad and Panvel, India; (2) ART s purchase of DoubleTree by Hilton (S$148m) in New York, US; (3) MUST s New Jersey acquisitions 500 Plaza Drive (US$115m) and 10 Exchange Place (US$313m), as well as CRCT recycling the proceeds from the sale of Anzhen (Beijing) into Rock Square (S$351m) in Guangzhou, China. Meanwhile, the share of properties acquired from third parties jumped to 77% in 2017 from 24% in 2016, the highest proportion in the last five years. The 21% of acquisitions were sponsor related and were mostly contributed by MLT s purchase of Mapletree Logistics Hub Tsing Yi in Hong Kong, and DASIN s purchase of Shiqi Metro Mall in Guangdong, China. Lastly, asset disposals continued to increase from S$306m in 2015 to S$555m in 2016 and S$1.8bn in The disposal was led by CCT s portfolio recycling as it sold One George Street (S$592m) and Wilkie Edge (S$280m). Lower cost of capital. Following the rally in S-REIT in 2017, the cost of capital for SREITs are now substantially lower than at the start of SREITs now trade close to 1.10x P/Bk versus a slight discount of at the start of 2017 at 0.95x. In addition, sectors such as office and hospitality which were previously trading at P/Bk of 0.80x are now at 1.0x P/Bk. Also, the average forward SREIT yield is now at 5.8% versus our forecast of 6.8% the year before. Equity market conducive for DPU-accretive acquisitions. Given the lower cost of capital, we believe SREITs are now poised to raise equity to pursue DPU-accretive acquisitions from third parties or their sponsors. This is on top of the debt headroom available with most REITs having a gearing of around 35%. We believe the restart of the inorganic strategy will further accelerate the growth in DPU. We also think the acquisitions will kick-start the positive feedback loop whereby accretion to DPU and a larger market capitalisation result in a compression in yields, which further aids REITs ability to pursue acquisitions to further accelerate growth. Acquisition value has declined for two years Acquisitions have shifted overseas Source: Various REITs, DBS Bank Page 29

30 Acquisition value has declined for two years Shifting to Third-party assets Source: Various S-REITs, Bloomberg, Thomas Reuters, DBS Bank Acquisitions announced by S-REITs in 2017 REIT Property Country Sector Value (S$m) Estimated Initial Yield Seller PREIT Four nursing homes and a Group home Japan Healthcare % Third Party Cache Boundary Road, 9 Laverton North Australia Industrial % Third Party AIT Avance Business Hub, Hyderabad India Office % Third Party CDREIT The Lowry Hotel, Manchester UK Hospitality % Third Party ART DoubleTree by Hilton Hotel, New York US Hospitality % Third Party FLT South Park Drive, Victoria Australia Industrial % Sponsor-related FLT 43 Efficient Drive, Victoria Australia Industrial % Sponsor-related FLT 8 Stanton Road, Seven Hills, New South Wales Australia Industrial % Sponsor-related FLT Lot 1, Horsley Drive Business Park, New South Wales Australia Industrial % Sponsor-related FLT 29 Indian Drive, Keysborough, Victoria Australia Industrial % Sponsor-related FLT 17 Hudson Court, Keysborough, Victoria Australia Industrial % Sponsor-related FLT Lot 1, Pearson Road, Queensland Australia Industrial % Sponsor-related LMRT Lippo Plaza Kendari, South East Sulawesi Indonesia Retail % Third Party DASIN Shiqi Metro Mall, Zhongshan China Retail % Sponsor-related MUST 500 Plaza Drive US Office % Third Party CDREIT Pullman Hotel Munich, Munich Germany Hospitality % Third Party KREIT 311 Spencer Street, Melbourne Australia Office % Third Party ESR 8 Tuas South Lane Singapore Industrial % Third Party Suntec Olderfleet, 477 Collins Street, Melbourne (50% interest) Australia Office % Third Party MLT Mapletree Logistics Hub Tsing Yi Hong Industrial % Sponsor-related Kong MUST 10 Exchange Place, New Jersey US Office 422.8* 5.10% Third Party CCT Asia Square Tower 2 Singapore Office 2, % Third Party Page 30

31 Acquisitions announced by S-REITs in 2017 (Continue) REIT Property Country Sector Value (S$m) Estimated Initial Yield Seller KDCREIT B10, Ballycoolin Business and Technology Park, Ireland Industrial % Third Party Blanchardstown, Dublin 15 AREIT 100 Wickham Street, Brisbane Australia Office % Third Party FHT Novotel Melbourne on Collins Australia Hospitality % Third Party LMRT Lippo Plaza Jogia Indonesia Retail % Sponsor-related LMRT Kediri Town Square Indonesia CRCT Rock Square, Guangzhou (51% interest) China Retail % Third Party AIT Arshiya Free Trade Warehousing Zone India Industrial % Third Party Total 6,393 Industrial 1,331 Retail 731 Office 3,619 Hospitality 653 Healthcare 60 *10 Exchange Plaza: Assuming USDSGD rate at 1.35 for acquisition consideration of US$313.2m Source: Various REITs, DBS Bank Disposals announced by S-REITs in 2017 REIT Property Country Sector Value (S$m) Buyer CIT 55 Ubi Avenue 3 Singapore Industrial 22.1 Third Party MLT 20 Old Toh Tuck Road Singapore Industrial 14.3 Third Party ART 18 residential properties in Japan (Zenith) Japan Hospitality Third Party CCT One George Street Singapore Office Joint Venture SGREIT Harajuku Secondo Property Japan Retail 5.1 Third Party AREIT 10 Woodlands Link Singapore Industrial 19.3 Third Party MINT 65 Tech Park Crescent Singapore Industrial 17.7 Third Party CIT 23 Woodlands Terrace Singapore Industrial 17.7 Third Party MLT Zama Centre Japan Industrial MLT Shiroishi Centre Japan Industrial Third Party ART Citadines Biyun Shanghai + Citadines Gaoxin Xi an China Hospitality ART Citadines Gaoxin Xi an China Hospitality Third Party CCT Wilkie Edge Singapore Integrated Third Party ESR 87 Defu Lane 10 Singapore Industrial 17.5 Third Party CRCT CapitaLand Anzhen, Beijing China Retail Third Party AREIT 13 International Business Park Singapore Industrial 24.8 Third Party MLT 4 Toh Tuck Link Singapore Industrial 14.5 Third Party MLT 7 Tai Seng Drive Singapore Industrial 68.0 Sponsor Total 1,801 Source: Various REITs, DBS Bank Page 31

32 S-REITs' gearing headroom and sponsor pipeline REIT Estimated Estimated debt Sponsor Potential Pipeline gearing end FY17/18F headroom 40% Office CCT 36% 316 CapitaLand n/a n/a FCOT 36% 131 Frasers Centrepoint Land Valley Point/Alexandra Point/Cecil Street Office property/australand properties High likelihood with Australand's properties though subject to FCOT s share price KREIT 34% 141 Keppel Land N/A Limited near-term pipeline from Sponsor OUECT 35% 273 OUE Limited OUE Downtown Potential in Retail CRCT 38% 123 CapitaLand Malls in China Subject to valuation and malls stabilising CMT 33% 831 CapitaLand Westgate, Star Vista, Bedok Mall, Ion Orchard Possible acquisition of Westgate FCT 29% 506 Frasers Centrepoint Limited Waterway Point, Northpoint City Pipeline assets under construction SPHREIT 26% 796 SPH Seletar Mall Seletar Mall yet to stabilise as it only opened in Dec-14 Commercial MCT 35% 493 Mapletree Investments Mapletree Business City (MBC) 1&2 MBC 2 under construction MAGIC 39% 95 Mapletree Investments SGREIT 36% 225 YTL Corporation Suntec 36% 626 Cheung Kong / ARA Source: Various REITs, DBS Bank Kowloon East Office n/a n/a Kowloon East office under construction, MAGIC looking at opportunities in China Focused on existing assets now No acquisition expected from sponsor Page 32

33 S-REITs' gearing headroom and sponsor pipeline (cont d) REIT Estimated gearing end FY17/18F Estimated debt headroom 40% Sponsor Potential Pipeline Industrial a-itrust 33% 218 Ascendas Group Other Ascendas Group Indian properties Subject to share price performance and stabilisation of INR A-REIT 36% 765 Ascendas Group Industrial assets Acquisitions likely to be from sponsor (business-park properties in Singapore) Cache 35% n/a CWT/ARA Ramp up warehouses Unlikely to acquire from sponsor from CWT ESR-REIT 36% 88 n/a n/a Exploring opportunities in Australia, Japan, and Malaysia MINT 30% 662 Mapletree Group Tai Seng development Under development and not likely to be acquired in the near term MLT 39% 118 Mapletree Group Properties in Hong Kong, China SBREIT 37% 64 Soilbuild Group Holdings Hospitality ASCHT 32% 228 Ascendas Group/Accor Various industrial properties / Australia Asia Pacific properties ART 36% n/a Ascott Group Serviced apartments in Europe, Quest apartments in Australia CDREIT 33% 343 City Developments St Regis, South Beach project FEHT 35% 252 Far East 7 hotels & serviced Organisation residences FHT 34% 264 Frasers Centrepoint Limited and TCC Group 17 hotels and serviced residences OUEHT 38% 76 OUE Limited OUE Downtown serviced apartments High likelihood of M&A to supplement growth, given headwinds in Singapore Exploring opportinities in Australia Potential disposal of Pullman Cairns to provide additional financial flexibility Subject to ability to recycle capital and raise equity Lower gearing provides firepower for acquisitions Assets not ready to be injected Subject to ability to raise equity Limited, given proposed acquisition of Crowne Plaza Changi and extension Healthcare P-Life 36% 116 IHH Hospitals in the region including Novena Mt Elizabeth Others KDCREIT 39% 31 Keppel T&T T27 Asset not stabilised yet IREIT 40% n/a Stella Holdings, Shanghai Summit, Mr Lim Chap Huat *Estimated by DBS Bank Source: Various REITs, DBS Bank n/a Low likelihood, given current share price Page 33

34 S-REITs with development potential and/or asset-recycling potential REIT Assets with redevelopment potential Potential asset-recycling opportunity Office CCT n/a n/a FCOT Currently undertaking AEI at Alexandra TechnoPark n/a KREIT n/a n/a OUECT n/a n/a Retail CRCT n/a Master-leased properties CMT Currently redeveloping Funan n/a FCT Currently undertaking AEI at Northpoint n/a SPH REIT n/a n/a Commercial MCT n/a n/a MAGIC n/a n/a SGREIT n/a n/a Suntec Currently redeveloping ark Mall n/a Industrial a-itrust Selected landbank n/a A-REIT Selected properties with unutilised GFA Older properties with limited medium upside Cache n/a n/a CREIT Selected properties with unutilised GFA Older properties with limited medium upside MINT Selected properties with unutilised GFA Older properties with limited medium upside MLT Selected properties with unutilised GFA Older properties with limited medium upside SBREIT Selected properties with unutilised GFA n/a Hospitality ASCHT n/a ART n/a Rental properties in Japan / Assets in lower-tier cities in Europe CDREIT n/a n/a FEHT n/a n/a FHT n/a n/a OUEHT n/a n/a Healthcare P-Life n/a n/a RHT n/a n/a Other KDCREIT n/a n/a IREIT n/a n/a Source: Various REITs, DBS Bank Page 34

35 4.4 Rally in SREITs to continue on the back of tightening yield spreads Tightening yield spreads in In our 2017 outlook report, we opined that with a 4% yield spread using a normalised bond yield of 3% or spot yield spread of 4.7% (using spot 10- year bond yield), provided sufficient buffer in a period of rising interest rates. This has played out in the rally in S-REITs as expectations for Singapore s economic growth were dialled up. Yield spreads to compress to 3%. Going into 2018, we believe yields spreads which currently stand at 3.6% will compress to 3.0%, below the historical average yield spread of 3.8%. While acknowledging that the overall S-REIT DPU growth in 2018 will be lower than in prior periods when yield spreads were around 3%, we believe there is still potential for yield compression given positive news flow from a cyclical upturn in the office, hotel, and industrial sectors and a return to positive DPU growth following declines in In addition, there remains abundant liquidity chasing yield products. We believe a proportion of the S$7bn worth of cash arising from recent residential en blocs in Singapore will be invested into the SREIT market. Furthermore, the emergence of various SREIT ETFs should drive future interest in the sector and leverage for some of these REIT ETFs will become available early next year. Moreover, the implied value of properties held by SREITs remain at a discount to the prices paid for physical-market transactions. We believe SREITs are still in the early stages of an earnings/dpu upgrade cycle as a lower cost of capital should enable SREITs to raise equity to pursue DPU-accretion acquisitions. Supply across the various property sectors will also be easing over the next three years and with a potential pickup in demand, we think we are at the start of a multi-year upcycle. The above factors not only support a compression in yield spreads but also for absolute yields to remain at close to - 1SD. Finally, partially driving the compression in yields are expectations for the Singapore 10-year bond yield to rise from around 2.1% to 2.5%. Forward S-REIT yield spread 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Sector Yield Mean Yield +1 SD -1 SD Page 35

36 Historical S-REIT yield and S-REIT yield spread (2005-current) Period Years Average 10year bond (%) Average S-REIT yields (%) Average S-REIT yield spreads (%) DPU growth (%) Average P/Bk (x) Comments Establishment of REIT market % 7.3% 4.4% 20.8% 1.07 Lack of familiarity with new asset class resulting in high yield % 6.5% 3.3% 17.6% 1.18 spreads High Growth % 3.4% 4.8% 5.0% 2.0% 1.6% 13.4% 10.9% was a period of high growth for S-REITs when average distribution growth was c.13% % 4.1% 1.2% 14.6% 1.47 over ; the key catalysts were acquisitions Aberration in valuations due to the GFC % 7.3% 4.5% 12.9% % 9.6% 7.3% -9.8% 0.66 Yield spread expanded due to the financial crisis Liquiditydriven recovery % 6.3% 3.9% 2.1% % 6.4% 4.2% 2.6% % 6.5% 5.0% 4.9% % 5.8% 3.8% 4.6% % 6.2% 3.8% 3.7% % 6.3% 3.9% 4.5% % 6.6% 4.6% -0.6% F 2.1% 5.7% 3.6% -0.9% 1.06 Periods 2005-cuurent 2.4% 6.3% 3.8% % 5.4% 2.4% 2010-current 2.1% 6.3% 4.2% Forward Current (FY18F) 2.1% 5.8 % 3.7% 1.7% 1.09 Normalised (FY18F) 2.5% 5.8% 3.3% 1.7% 1.09 After the global financial crisis, the sector saw yield compression in before the Fed hinted at rate hikes in mid-2013 Page 36

37 Singapore Office REITs P/Bk NAV during market cycles (x) x 1.05 x 0.83 x 0.92x 0.82x 0.72x 0.97x 0.82x 0.90x Index Value 250 Office Upcycle Office Office 0.20 ( ) Recovery Recovery ( ) ( ) P/NAV Mean -1 SD +1 SD URA Office Index During the last sustained upswing in the Singapore office market between 2005 and 2008, office REITs traded at up to 1.5x book or c.1.3x (+1SD) With modest new supply over the next 3-4 years, we believe we are on the cusp of another period of sustained improvement in spot rents. Thus, we believe there is potential for S- REIT s to again trade at a premium to book and, towards the end of the cycle, potentially push towards x book from the current 1.0x P/Bk Source: Various REITs, DBS Bank CDL Hospitality Trusts P/B experience (x) Hotel Upcycle ( ) Hotel Upcycle ( ) CDREIT P/BV Mean +1 SD -1 SD 12month trailing RevPAR RevPAR (S$) During upturns in RevPAR such as , CDREIT traded at a premium to book Should the Singapore hospitality market recover in 2018 and exhibit strong RevPAR performance over the next three years, we believe Singapore s hospitality REITs have the potential to trade up to between 1.1x (CDREIT s average P/B) and 1.3x (+0.5 SD above CDREIT s average P/B) P/B typically rises ahead of an improvement in RevPAR and peaks out halfway through the upcycle Page 37

38 4.5 Prefer office and hospitality sectors 4.6 Top picks Sector preferences (1) Office, (2) Hospitality, (3) Industrial, and (4) Retail. Office REITs have done well in 2017, with their share prices increasing on average by more than 20%. While the DPU profile is expected to remain flat over the next couple of years, we still like the office sector given the recovery in spot rents and the fact that the implied value of the Singapore portfolio in office REITs are trading at a discount to recent market transactions. In addition, office REITs have the potential to trade at x book in an upcycle versus 0.97x currently. With supply pressure easing and demand picking up, we expect office rents to increase over the next 3-4 years. Consistent performers and value plays in the large-cap space. Within the large-cap space, we believe consistent performers with steady DPU growth will continue to attract investor interest. Stocks that exhibit this attribute are Ascendas REIT (AREIT) and Mapletree Logistics Trust (MLT). We like AREIT for the green shoots that are emerging; namely, an improvement in occupancy and rental reversions turning positive. Additionally, its strong balance sheet allows it to pursue DPUaccretive acquisitions in Australia and Singapore. Furthermore, there is redevelopment upside from the rejuvenation of the Science Park precinct given its scale. Our second preference is the hospitality sector. Following a downturn over the past three years, we expect RevPAR to stage a multi-year recovery, growing at a conservative 3-5%per annum. This is premised on steady demand and new hotel supply moderating from 4-6% experienced over the past few years to 1-2% per annum growth over the next three years. This, in turn, should result in DPU growth of between 3-5% per annum, up from 4-6% declines seen in Given the strong DPU outlook, we see potential for hotel REITs to trade above book from 1.0x book currently. The third preference is the industrial sector largely due to the downward pressure on DPU from the smaller industrial REITs. We remain positive on the large cap industrial REIT despite them trading at a premium to book, given limited downside risks and steady DPU growth. Meanwhile, MLT s key markets of Australia, Hong Kong, Japan, and Singapore are on the upturn, which underpins its steady DPU profile. MLT should also benefit from the full-year contribution from the acquisition of Mapletree Logistics Hub Tsing Yi. Similar to AREIT, with MLT now trading above book value, it is also in a strong position to supplement its earnings through inorganic means. In terms of value plays, we like Keppel REIT (KREIT) and Mapletree Greater China Commercial Trust (MAGIC) despite their modest DPU profile. For KREIT, the implied value of its Singapore office portfolio stands at S$2,600 psf versus recent market transactions for similar quality buildings at S$2,700-2,900 psf and the implied value of completed office buildings from recent land tenders of more than S$3,000 psf. We ranked the retail sector last due to the known headwinds from e-commerce and increase in supply, which have resulted in declining spot rents and negative rental reversions for selected REITs. Nevertheless, with expectations for a global synchronised growth next year (as predicted by our DBS economists), a recovery in the Singapore residential market, and the large injection of cash into the Singapore economy from the slew of en-bloc sales, there is potential for a recovery in retail sales. Thus, we would recommend investors to take a second look at the sector in 2H18, given expectations for the sector are low and investors are generally underweight retail REITs. MAGIC is also a value play in our eyes, given its forward yield of % is too high considering the quality of its portfolio, strong performance record, and Hong Kong peers trading in the mid-5% yield. Finally, we like Suntec REIT (SUN) for the turnaround of Suntec Mall. Passing rents for the mall are currently between S$10-11 psf/mth versus S$15-18 psf/mth for other malls in Singapore, providing sufficient upside. We believe SUN will close the rental discount as we are confident that CEO Chan Kong Leong has the necessary retail expertise to execute the turnaround plans. Since the start of his tenure, he has been able to drive a significant improvement in tenant sales and foot traffic. Furthermore, in our view there should be takeover premium ascribed to SUN. While we are not privy to its sponsor, ARA Page 38

39 Asset Management s intentions, we believe the REIT is vulnerable to privatisation if the market does not recognise the upside to book value, given ARA Asset Management is now backed by partners with deep pockets, i.e. Warburg Pincus and AVIC Trust. Finally, while SUN s DPU profile is flat and supported by capital distributions, the quality of its DPU should improve as SUN executes its Suntec Mall turnaround. deliver 5-6% per annum growth in DPU over the coming two years. This is largely due the completion of the AEI works at Northpoint. Furthermore, we believe FCL may sell Waterway Point to its subsidiary, FCT, to lower its gearing which rose to 0.9x from 0.8x after it bought a residential development site for S$1bn. If this transpires, it should further accelerate FCT s DPU. Gain exposure to hospitality sector. Within the mid-cap space, we recommend investors position themselves for a recovery in the Singapore hospitality market. Our key picks for this theme are CDL Hospitality Trust (CDREIT) and Frasers Hospitality Trust (FHT). We like CDREIT as the implied value of its Singapore portfolio stands at S$600k per key, compared with other hotels in Singapore which have transacted in excess of $650k per key and other Singapore hospitality REITs at between S$700k to S$1m. We also like FHT given its yield of 6.5% is at least 50bps higher other hospitality REITs. We believe this spread is too wide considering the quality of its hotels as well as its large exposure to the growing Sydney and Melbourne hospitality markets. FCT baby thrown out with the bath water. In the mid-cap retail space, we recommend investors position themselves in Frasers CentrepointTrust (FCT). While most investors have avoided the retail sector on concerns over e-commerce and new supply growth, we believe FCT provides a unique exposure and opportunity. In comparison to other retail REITs which are expected to deliver flat growth, we project FCT to 4.7 Changes to TP and recommendations Increased confidence in office and hotel sectors. On the back of our DBS economists more bullish economic outlook, we believe the market will ascribed a higher P/Bk for office and hospitality REITs. Thus, we have raised our TPs for various office and hospitality REITs. We have also upgraded Mapletree Commercial Trust (MCT) to BUY from HOLD as we roll forward our valuation. We believe MCT deserves a premium rating given its best-in-class retail and business-park assets. We have also upgraded SUN given our confidence in the ability of CEO Chan Kong Leong to turn Suntec Mall around, as well as a potential takeover should investors not recognise the upside to book values given the scramble for commercial assets in Singapore. Finally, we recently downgraded SPH REIT (SPHREIT) to HOLD as it had hit our price target, which already assumes the acquisition of Seletar Mall. Page 39

40 Change to recommendations and TP s TP (S$) TP (S$) Recommendation Recommendation REIT Previous New Change Previous New Office CCT % BUY BUY FCOT BUY BUY KREIT % BUY BUY OUECT HOLD HODL Suntec % HOLD BUY Retail CRCT % BUY BUY CMT BUY BUY FCT BUY BUY SPH REIT BUY HOLD Commercial MCT % HOLD BUY MAGIC BUY BUY SGREIT BUY BUY Industrial a-itrust BUY BUY A-REIT BUY BUY Cache HOLD HOLD ECREIT HOLD BUY FLT BUY BUY MINT BUY BUY MLT BUY BUY SBREIT HOLD HOLD Hospitality ASCHT % BUY BUY ART BUY BUY CDREIT % BUY BUY FEHT BUY BUY FHT % BUY BUY OUEHT % BUY BUY Healthcare P-Life BUY BUY RHT HOLD HOLD Others IREIT HOLD HOLD KDCREIT BUY BUY MUST BUY BUY Source: DBS Bank Page 40

41 Selected S-REITs offer a strong growth profile REIT Sector Sector growth FY16-17F DPU growth Growth driver CCT Office 1.3% 3.7% Acquisition of 60% remaining interest in CapitaGreen MCT Office/ Commercial 1.3% 2.5% Acquisition of Mapletree Business City AIT Industrial 0.8% 8.1% New developments and acquisition of BlueRidge Phase II CRT Retail (Japan) 1.1% 8.7% Improved SGD/JPY hedge rate OUEHT Hospitality -1.3% 5.0% Acquisition of Crowne Plaza Changi Airport Extension, opening of Michael Kors and Victoria s Secret stores and low-base effects KDCREIT Data-centre (industrial) 0.8% 5.0% Acquisition of data centres in Milan and Singapore MUST Office (USA) 1.3% 7.8% Improvement in the US office market Source: Various REITs, DBS Bank Page 41

42 5 Residential subsector Outlook: The quantum leap up Key Points Property prices to increase by 3%-5% per annum over Transaction volumes to continue increasing into 2018 to the tune of 5% Supply remains low, expect higher land supply in 1H18 GLS At the cusps of recovery. The property price index (PPI) recorded its first increase after 15 negative quarters since Although the ghost festival month fell in 3Q17, sales volume remained at good levels, especially in the secondary market. We remain property bulls and continue to see higher transaction velocity and prices for the Singapore property market in We expect a price recovery to the tune of c.3-5% per annum over the next two years. With only c.2,700 of unsold residential units as of 3Q17 (unsold units in launched projects) representing one of the lowest supply in recent years, coupled with the rebound in residential sales, puts the pricing power back to developers and landlords. With the developers hungry for land bank, we expect the government to release more land supply in 1H18 GLS (I thought it was flat h-o-h), expected to be announced in mid- December In addition, the government has recently launched/released a few land sites that are situated at attractive locations such as Jiak Kim Street, Fourth Avenue, Cuscaden Road, Handy Road and Sumang Walk (EC). 5.5 Trends, Demand and Supply Outlook 3Q17 PPI showed the first increase after 15 negative quarters led by landed and non-landed properties (mainly OCR and RCR) (Chart 1). 3Q17 PPI showed its first increase (+0.7% q-oq) after 15 negative quarters since 4Q13. Landed property prices saw a larger increase of +1.2% q-o-q while non-landed recorded +0.6% q-o-q. Non-landed property prices saw positive changes in all regions, with Outside Central Region (OCR) and Rest of Central Region (RCR) recording larger increase of 0.8% q-o-q and 0.5% q-o-q respectively while the Core Central Region (CCR) prices increased 0.1% q-o-q. PPI troughed in 2Q17 at 12.3% from the September 2013 peak. Following PPI improvement in 3Q17, the decline from September 2013 peak has contracted to 11.6%, with landed properties recording the largest decline of 16.1% despite the higher q-o-q increase in 3Q17. Prices in the Central Region fell more compared to those in the suburbs, with RCR and CCR down 11.6% and 11.3% respectively from the peak. Residential market summary Key Indicators % q-o-q 4Q16 1Q17 2Q17 3Q17 Price Index 0.7% Rental Index Transactions* -13.5% 2,316 2,962 3,077 2,663 Pipeline of supply -1.1% 40,913 36,942 35,423 35,022 Vacancy rate - 8.4% 8.1% 8.1% 8.4% * primary sales excluding executive condominiums Source: URA, DBS Bank Page 42

43 : Residential price indices Gradual decline in prices Period All- Residential Index Landed Index Non-Landed Non-Landed Index HDB Index Core Central Region Region 3Q13 0.4% 0.3% 0.6% -0.3% -0.9% 2.2% -0.9% 4Q13-0.9% -1.0% -0.9% -2.1% 0.4% -0.9% -1.6% 1Q14-1.2% -0.7% -1.3% -1.0% -3.3% -0.1% -1.6% 2Q14-1.1% -1.7% -0.8% -1.5% -0.3% -0.9% -1.4% 3Q14-0.7% -1.8% -0.4% -0.8% -0.4% -0.4% -1.7% 4Q14-1.1% -1.3% -1.0% -0.9% -1.3% -0.8% -1.5% 1Q15-1.0% -0.9% -1.1% -0.4% -1.7% -1.1% -1.0% 2Q15-0.9% -1.0% -0.8% -0.6% -0.6% -1.1% -0.4% 3Q15-1.3% -0.4% -1.5% -1.2% -2.2% -1.6% -0.3% 4Q15-0.5% -1.8% -0.2% -0.3% 0.2% 0.0% 0.1% 1Q16-0.7% -1.1% -0.6% 0.3% 0.0% -1.3% -0.1% 2Q16-0.4% -1.9% -0.1% 0.3% 0.2% -0.5% 0.0% 3Q16-1.5% -2.3% -1.2% -1.9% -1.0% -1.0% 0.0% 4Q16-0.5% 0.8% -0.8% 0.1% -2.0% -0.6% -0.1% 1Q17-0.4% -1.8% 0.0% -0.4% 0.3% 0.1% -0.5% 2Q17-0.1% -0.3% -0.1% -0.5% 0.6% -0.3% -0.1% 3Q17 0.7% 1.2% 0.6% 0.1% 0.5% 0.8% -1.4% Rest of Central Outside Central Region % y-o-y Change (3Q17) % Change (Peak) 3Q17 (index) Source: URA, HDB, DBS Bank -0.2% -0.2% -0.3% -0.7% -0.6% % -11.6% -16.1% -10.1% -11.3% -11.6% -9.8% -11.7% Page 43

44 Transactions Rentals Sales volume eased off q-o-q in 3Q17 but remained at high levels; secondary sales remained strong. Total private primary residential transactions eased off in 3Q17 to 2,7000 units (- 13.5% q-o-q; +34% y-o-y), partially due to lower property launches (-15% q-o-q; -31% y-o-y) and ghost festival month in August/September However, on a y-o-y basis, we saw volumes continuing to rise (3Q17 sales +34% y-o-y) despite lower launches (-31% y-o-y). Despite the lower sales, the volumes have held up to be higher than the quarterly transactions in the past three years. Total residential transactions hit nearly 8,200 units, a level not seen since 1Q13. Despite the ghost festival month, secondary sales transactions remained resilient, inching up marginally by 5% q-o-q to 4,000 units. This is the sales volume level which we last saw in Total primary transactions (private plus executive condominiums (EC) rose 4% q-o-q; and 24% y-o-y to 4,200 units while EC sales increased 61% q-o-q and 10% y-o-y to 1,600 units, following the launch of Hundred Palms which was sold within a day. Supply Supply completion to start moderating from 2017 onwards before completion of current new launches from 2020 onwards.completions continue to ease off (-1.1% q-o-q) following 3-4 years of low property launches. While we would expect completions to start moderating from 2017 onwards, the new units available for sale are expected to pick-up following the increased en-bloc transactions (estimated at c.12,000 units coming into the market in 2018/2019) and increased government land sales (expected 6,000 units 2018/2019 and more land tenders to come by year-end). In addition, there are another c.40,000 units of potential en-bloc sites for sale. Rental yields appear to have bottomed out despite deterioration in vacancy rates in 3Q17. The 3Q17 residential rental index (RRI) appears to have bottomed out with prices stayed flat q-o-q despite vacancy rates increasing to 8.4% after two quarters of improving vacancy. Rental on landed residential homes have turned positive (+1% q-o-q) offset by non-landed residential homes (-0.1% q-o-q). On a q-o-q basis, rentals in CCR and OCR continues to fall at 0.8% and 0.3%, respectively, while RCR saw a turn (+0.9% q-o-q) in 3Q17. Vacancy rates saw a deterioration again this quarter to 8.4% after two quarters of improvement to 8.1% in 1Q17 and 2Q17. The peak was in 2Q16 at 8.9%. Vacancy rate remains high, above the historical average of 7%. While the completions may ease off in the next 1-2 years due to fewer property launches in the past 3-4 years, there could be an upward bias risk on the vacancy rates thereafter given the upcoming new launches expected from 2018 onwards following the improved sentiment in the property market and the redevelopment of en-bloc sites. Employment and immigration policies are still key factors to keep an eye on. The preliminary overall unemployment rate remained stable at 2.1% q-o-q in 3Q17. Page 44

45 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Industry Focus Property Transactions Developers' sales by type 6,000 Units 130% 1. Primary sales volume 5,000 4,000 3, % 110% 100% 90% remains strong despite fewer property launches 2. Take-up rates (rolling four quarters) are above 100%, implying improved sales 2,000 1,000 80% 70% momentum on projects that were launched earlier - 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 60% Private Residential Units Launched (uncompleted) Total Direct Sales (Uncompleted) % sell-through rate (rolling 4 quarters) - RHS Source: URA, DBS Bank Developers' sales by type 9,000 8,000 7,000 6,000 Units Secondary Sales Primary Sales (Private) Executive Condominiums 1. 3Q17 recorded strong sales volume (despite ghost festival month), close to 1Q13 levels when the market peaked 5,000 4, In 3Q17, volume growth seen in all segments; 3,000 resale sales (up 54% y-o- 2,000 y), primary sales (up 34% y-o-y) and ECs up 10% 1,000 - Source: URA, DBS Bank Page 45

46 Units ('000) Units Industry Focus Developers' sales by region 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 1. Transactions in CCR (led by Sophia Hills and Martin Place) rose 85% y-o-y while sales in RCR increased 57% y-o-y in 3Q17 2. However, due to the uptick in CCR sales, the mix between areas moved slightly towards higher weightage on CCR contributing 22% of total transactions, up from 17% in 2Q17 Source: URA, DBS Bank CCR RCR OCR Residential Supply Outlook Supply of new residential units by expected year of completion Public Housing Private Residential Executive Condo 1. Close to 53,000 units were completed in New unit completions to taper off due to the cuts in land tenders from the government's land sales programme; completion to pick up in 2020, led by completion of HDBs 3. Public housing supply is expected to peak in 2017 at 27,000 units before tapering off to a low of 16,000 in 2019 Source: Ministry of National Development, DBS Bank Page 46

47 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Industry Focus Residential Rental Outlook Rental index weakening since 4Q13, in line with property prices 15% 10% 5% 0% -5% -10% % Chg Q0Q Chg in Rental Index PPI Index Index Value The RRI had declined only 0.2% from the previous quarter during 2Q17, possibly due to stable vacancy rates (flat q- o-q) 2. As vacancy rates had stabilised in 2Q17 (flat q-o-q at 8.1%) and completions appear to have peaked in 2016, we expect the decline in rentals to stabilise Source: URA, HDB, DBS Bank Rental index remains weak on high vacancy rates 10.0% (%) Index Value 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% Despite a slight deterioration in the vacancy rate in 3Q17 back to 8.4% after 2 quarters of improvement, rental rates seem to have bottomed out this quarter (flat q-o-q) Vacancy Rate (Non-Landed) (LHS) Rental Index (Non-Landed) (RHS) Source: URA, HDB, DBS Bank Page 47

48 6 Office subsector outlook: A multi year recovery Key Points A two-tier market to emerge with Grade A office space leading the recovery. Grade B space will likely grapple with increased competition Office rents to rise by 25% till 2020 to reach S$12-13 psf Lack of new completing supply supports landlords ability to price high Expect a recovery in office rents. Based on the CBRE data, Grade A CBD office rents bottomed in 1Q17-2Q17 at S$8.95 psf/mth which is earlier than consensus and our expectations of a low at the end of 2017 and early Since then, Grade A CBD rents have started to recover, increasing 1.7% q-o-q to S$9.10 psf/mth in 3Q17 albeit still down by 2.2% y-o-y. This is the first q-o-q increase in ten quarters. The improvement in rents was despite Grade A CBD occupancy dropping to 91.6% from 95.5% on completion of Marina One East Tower. Going into 2018, we project Grade A office rents to continue rising on the back of an improvement in the overall Singapore economy as the pick-up in the manufacturing sector should feed through to the services sector, as well as the easing of new office supply. We forecast rents to hit S$9.30 psf/mth by end-2017, rising to S$10.00 psf/mth by end The recovery in Grade A office rents will likely be driven by a rise in the premium Grade A office rents resulting in a two-tier market with rents for the older Grade A and potentially Grade B buildings lagging. This is because the flight to quality trend remains as tenants seek buildings with more efficient floor plates and specifications. Thus, overall vacancy rates should continue to climb near term largely due to some structural vacancy for the older Grade A buildings. The older Grade A stock are predominantly located in Shenton Way and Raffles Place. Office rents and occupancies Rents 3Q16 2Q17 3Q17 q-o-q y-o-y URA Office Rental Index: Central Area % -4.8% URA Office Rental Index: Fringe Area % 1.3% CBRE Grade A Core CBD (psf/mth) % -2.2% CBRE Grade B Core CBD (psf/mth) % -2.7% Occupancy 3Q16 2Q17 3Q17 q-o-q (bps) URA occupancy private sector: Central Downtown Core 88.9% 86.9% 85.9% URA occupancy private sector: Central Fringe Area 88.5% 85.9% 84.1% y-o-y (bps) 1. Grade A CBD office rents have started to recover, rising 1.7% q-o-q to S$9.10 psf. Although Grade B rents have also started to improve as expected, they lagged. 2. Occupancy level has risen largely due to the completion of Marina One East Tower. CBRE Grade A 95.9% 95.5% 91.6% CBRE Core CBD 95.9% 94.1% 92.5% Source: URA, CBRE, DBS Bank Page 48

49 6.1 Trends, Demand and Supply Outlook Demand Sluggish office demand thus far but potential increase in demand in Over the past three years, the compound annual growth rate (CAGR) for the four key sectors that drive office demand, (1) financial services, (2) IT and other information services, (3) legal, accounting and management services, and (4) insurance services, grew at c.5%. However, with an uncertain outlook, demand for new office space had been sluggish with the take-up for new offices being mainly due to relocations rather than for expansionary purposes. For the first nine months of 2017, around 592,000 sqft of space was taken up in the Downtown Core area compared to historical average demand of over 1m sqft of space annually during more buoyant economic conditions. However, with GDP growth for Singapore expected to exceed 3% in 2017 and signs that the pick-up in the manufacturing sector earlier this year is starting to flow through to the services sector, there is potential for an improvement in office demand in Beyond a general pick-up in economic activity, there has also been the emergence of the IT sector as a driver of office space. Should Singapore continue to build up an ecosystem of technology companies and fintech start-ups, demand from the technology sector should provide another boost to overall office demand. Strong pre-commitment levels from new supply. Based on recent press reports, pre-commitment levels at Marina One stand at around 80-85% with Duo Tower s occupancy up to 60% and Guoco Tower now at 99%. In addition, upcoming supply such as Frasers Tower (scheduled to be completed in 2018) was reported to have achieved pre-commitment levels of 40% (including leases in advanced negotiations). With the strong take-up or pre-commitment levels at the recently completed or upcoming supply, in our view there is less incentive for these newer buildings to offer heavy discounts to secure tenants. In fact, we understand these landlords have started to raise asking rents which should be supportive of a recovery in spot rents going into 2018 and beyond. Supply Elevated new supply in 2017 before easing over After the completion of Guoco Tower and Duo Tower in 2016, new office supply was elevated in 2017 largely due to the completion of Marina One (c.1.9m sqft). Net supply in the downtown core region increased by 7% in 2017, following a 6% increase in However, supply is expected to ease thereafter, growing by only 1-2% per annum. In 2018, only Frasers Tower (c.664,000 sqft) and the redevelopment of International Factors Building/Robinson Towers (c.194,000 sqft) will be coming on stream and Funan (c.204,000 sqft) in The next wave of supply will come around 2020 when CPF Building (500,000 sqft) and Afro-Asia Building Redevelopment (154,000 sqft) are completed and in 2021, Golden Shoe (c.635,000 sqft), followed by the Central Boulevard (1.26m sqft) and Beach Road sites (potentially 760,000 sqft) in Shadow space. Given a large proportion of the tenants in the upcoming or recently completed new buildings are mainly from relocations from existing offices, there is potential overhang on the market from the shadow space from these buildings. However, we note that some of the space may be temporarily taken out of the market when they undergo refurbishment such as in Republic Plaza and/or given the relative inefficiency, remain vacant given their uncompetitive positioning. Competition from Business Park space abating. Business Park rents have stayed fairly flattish over the past five years, and the pricing advantage expanded when Grade A rents increased by around 20% from 3Q13 to their peak in 1Q15-2Q15. Firms which wanted to achieve significant cost savings and were eligible to be located in business parks, had thus relocated from the CBD while maintaining a leaner presence there. However, with the recent fall in Grade A office rents, the business parks' pricing advantage has narrowed. Business park rents are now at c.43% of Grade A office rents, up from c.35% in 1Q15. This may stem the flow of relocations to business parks, especially with limited new business park space coming on stream over the next few years. Forecasts Spike in vacancy but market moves to two-tier market. On the back of a jump in supply, we expect the Private Sector Downtown Core vacancy rate to potentially spike from 13% at the end of December 2016 to 17% in 2017 before easing to 16% by end-2018 as demand picks up. While the headline vacancy rate is high, the vacancy rate will be composed of two very different markets. One would consist of the older buildings such as those in Shenton Way and Raffles Place where there will be a structural or persistent high vacancy potentially in excess of 20% as these buildings are unable to compete against the new buildings currently under construction or recently completed, due to less efficient floor plates and modern specifications. In contrast, newer buildings or those defined as Category 1 office buildings by URA will enjoy substantially lower vacancies, closer to the 10% level, as the flight to quality takes place, i.e. tenants seeking better-quality offices to cater to their expansion plans or consolidate their various offices into a single location. According to URA, Category 1 office buildings are defined as those located in core business areas in Downtown Page 49

50 Core and Orchard Planning Area, which are relatively modern or have been recently refurbished, command relatively high rentals, and have large floor plate sizes and gross floor areas. Multi-year recovery from 2018 onwards. Following the bottoming of Grade A CBD office rents in 1Q1-2Q17 and first q-o-q increase in ten quarters in 3Q17, we expect rents to continue their upward trajectory over the coming 3-4 years. This is expected to happen as the new supply of offices eases, expectations that demand normalises towards annual 1m sqft demand in the medium term as economic growth recovers and business confidence returns, as well as the upcoming new office supply asking higher rents to make an economic return given the high land prices in Singapore. Thus, we project Grade A office rents to recover from the S$8.95 psf/mth low in 2017 towards S$10 psf/mth by end-2018 before rising to S$12-13 psf/mth by URA rental index (central) growth vs. changes in employment for financial institutions (1998 present) 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% Employment - Financial & Insurance Services (RHS) URA rental index - central (LHS) 20% 15% 10% 5% 0% -5% 1. Between 1998 and 2015, there was 90% correlation between changes in the URA rental index (central) and employment growth in the financial services sector. 2. Lower correlation in rents and financial services employment from 2012 onwards (73%) reflects a diversification in demand for CBD office space from other sectors such as technology, media and telecommunications, commodities/resources and professional services. 3. Employment in the financial institution sector will still have a large influence on the direction of rents in the CBD. Source: URA, Singstat, CEIC, DBS Bank Page 50

51 Pick up in manufacturing to feed through the services sector 1. Following a pick up in manufacturing in early 2017, our DBS economists expects the positive momentum to flow through to the services sector. In 2018, the service sector will be the main driver for Singapore s GDP growth. The services sector is the main industry that drives overall office demand. Source: URA, CBRE, DBS Bank Demand outlook for key sectors that drive CBD office demand turning up Key sectors for CBD office demand Legal, Accounting and Management Services, 30% Insurance Serivces, 8% 3-year headcount CAGR ( ) Total Legal, Accounting and Management Services Insurance Serivces Financial Services IT and Other information Services, 21% Financial Services, 41% 2% Thousands % 5% 7% Improvement in cumulative number of employed in the services industry Outlook M 6M 9M 12M Key drivers of CBD office demand include financial services, legal and accounting sectors as well as IT and other information services. 2. Between 2013 and 2016, these key sectors led CBD office demand, and reported headcount increases of 2-7% p.a. 3. Business confidence has been muted over the past year given an uncertain economic outlook. However, strong GDP growth over the past couple of quarters should see Singapore delivering in excess of 3% GDP growth in Coupled with expectations of synchronised recovery in global growth in 2018, we believe there should be an increase in headcoun for the major sectors that drive office demand over the coming few years. Thus far, there has been a pick up in overall services employment, with total jobs added rising 18% y-o-y for the first nine months of IT and Other information Services 6% Source: Singstat, CEIC, DBS Bank 0.0% 5.0% 10.0% Page 51

52 Office supply in the Central Area Office (CBD) Location Developer Estimated NLA (sqft) Property Type Occupancy/ Precommitment/ sold 2017 Marina One Marina Bay M + S 1,875,630 Leasing 80-85% EON Shenton Shenton Way UIC 101,045 Strata Sale 85% UIC Building Shenton Way UIC 277,540 Strata Sale 85% Oxley Tower Robinson Road Oxley Consortium 111,710 Strata Sale 75% Robinson Road 70,000 Strata Sale 14% Robinson WyWy Developments 2,435, Redevelop-ment Robinson Road Tuan Sing 194,380 Strata Sale n/a of International Factors Building and Robinson Towers Frasers Tower Cecil Street Frasers Centrepoint 664,000 Leasing 40% Limited 858, Funan North Bridge CapitaLand Mall 204,000 Leasing n/a Road Trust Park Mall Orchard Singhaiyi & Suntec 352,000 Leasing n/a 2020 CPF Building Shenton Way Ascendas- Singbridge, Mitsui and Tokyo Tatemono Afro-Asia Building Redevelop-ment Shenton Way Afro-Asia Shipping Co (AAS) and Shimizu Corporation Investment and Development 2021 Golden Shoe Market Street CapitaLand Commercial Trust 2022 Central Boulevard White Site Marina Bay IOI Properties & Hongkong Land 556, ,000 Leasing n/a 154,000 Leasing n/a 654, ,000 Leasing n/a 635,000 1,260,000 Leasing n/a Beach Road Bugis GuocoLand 760,000 Leasing n/a 2,020, A 7% increase in supply in the downtown core region in 2017, following a 6% increase in Following the jump in supply in , the new office supply should ease and is more staggered from A pick-up in new CBD supply will only occur in 2022 when the Central Boulevard and Beach Road sites are scheduled to be completed. Source: URA, Corporate Locations, CBRE, various REITs and corporate, press reports, DBS Bank Page 52

53 Industry Focus Decentralised office supply Office (Decentralised) Location Developer Estimated NLA Property (sqft) Type 2017 Arc 380 Eastern Suburbs Tong Eng Group 103,500 Strata Sale - Jalan Besar Vision Exchange Western Suburbs 500,000 Strata Sale - Jurong 603, Paya Lebar Central 2019 Woods Square Eastern Suburbs - Paya Lebar Northern Suburbs - Woodlands Lend Lease / ADIA 750,000 Leasing 750,000 Far East Organisation 534,500 Strata Sale 534, Over the next few years, supply of decentralised office space will be steady. As a large majority of this new supply is being sold as strata units potentially for smaller users and owner occupiers, they will compete directly with CBD space. 2. However, in 2018, Paya Lebar Central may pose some form of competition to CBD office space if Lendlease/ADIA is able to position the property as a viable alternative. Source: URA, Corporate Locations, CBRE, various REITs and corporate, press reports, DBS Bank DBS Grade A office rental forecast ( ) 3,000 2,500 2,000 1,500 1, ,000-1,500 '000 sqft Source: URA, CBRE, DBS Bank Net supply: Downtown Core (LHS) CBRE Grade A office rents (RHS) Post GFC S$ psf pm average: 1.1m sqft average: 1.1m sqft Net demand: Downtown Core (LHS) Grade A CBD rents bottomed out in 1Q17-2Q17 and increased q-oq for the first time in ten quarters in 3Q The main factor driving office demand is expected to come from an increase in economic activity and a pick-up in manufacturing activity flowing through to the services industry. Hence, we expect rents to increase from a low of S$8.95 psf/mth to S$9.30 psf/mth by end before rebounding to S$10 psf/mth by end Thereafter we forecast rents to increase to S$12-13 psf by 2021/2022. Page 53

54 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Industry Focus Two-tier Grade A office market to develop S$ psf / mth Spread between Premium Grade vs Grade A (RHS) Colliers Premium Grade Raffles Place/New Downtown (LHS) CBRE Grade A Core CBD (LHS) Source: URA, CBRE, DBS Bank 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 1. While we expect overall Downtown Core vacancy rate to be elevated, c.17% by end-2017 and c.16% by end-2018, we believe a two-tier market will develop. 2. The first submarket will be related to the older buildings in Shenton Way and Raffles Place where vacancy levels will be structurally higher given an uncompetitive product (lower efficiency and older specifications), thus resulting in lower rents. 3. The other category will be the premium grade buildings, largely consisting of new buildings currently under construction or built over the past 5-6 years. These will command higher rents and achieve higher occupancies. This is evidenced by the wide spread between Premium Grade rents (as reported by Colliers) and overall Grade A core CBD rents (as estimated by CBRE). Page 54

55 7 Industrial Sector Overall Outlook: A gradual bottoming out Key Points 2018 a year of consolidation for most industrial subsectors but downside risk to rents is abating. Businss Park and Warehouse sub-sectors to bottom out ahead of other industrial sub-segments Rental reversions for most segemtns still negative; turning up only from 2019 Bottoming out. We believe that the outlook for Singapore s industrial sector will remain soft in the immediate term and will only start to bottom out from end of 2017 on the back of abating supply risk. Rental rates are expected to bottom out in The recent recovery in manufacturing sector is fuelling expectations that demand could pick up in 2018, just as the total number of supply abates. However, the recovery is uneven as firms still look to consolidate or downsize their space requirements to remain cost efficient. Vacancy rates are expected to remain on an uptrend to reach 11% and bottom out only from Manufacturing Sector expanded in The Singapore Manufacturing sector in recent times is showing signs of a rebound in activity with the Singapore s purchasing managers index continuing to record an expansion. The September purchasing manager s index (PMI) reading stood at 52.0, which indicates more robust business activities going forward. The Singapore Institute of Purchasing and Materials Management (SIPMM), which compiles the PMI, said the latest reading was driven by a faster rate of expansion across all key indicators. New orders, export demand and output were all up. The electronics sector gained 0.4 point from August to post a reading of 53.6 its 14th straight month of expansion and the highest level since July This was due to a faster rate of expansion across key indicators of the sector, although employmentrecorded a slower rate of growth, said the SPIMM. Key Indicators % Change 2017 % Change third quarter second quarter (q-o-q) third quarter (y-o-y) Price Index Industrial Property % % Multi-User % % Rental Index Industrial Property % % Multi-User Factory % % Single-User Factory % % Warehouse % % Business Park % % Vacancy rate Industrial Property 10.5% 11.30% 1.0% 11.44% 8.9% Single-User Factory 9.4% 9.60% 3.3% 9.60% 2.1% Multi-User Factory 12.9% 13.60% 2.4% 13.60% 5.4% Warehouse 10.9% 11.87% -1.9% 12.50% 14.6% Business Park 18.9% 14.30% -5.9% 14.10% -25.4% Pipeline under construction Industrial Property % % Single-User Factory % % Multi-User Factory % % Warehouse % % Business Park nm 2.3 nm Source: JTC, DBS Bank Page 55

56 7.1 Trends, demand and supply outlook Demand Net Surplus of space. As of third quarter 2017, take-up for industrial space still lagged behind the increase in supply, with a net increase in unoccupied space of close to 1.1m square feet (sqft). It is expected that the majority of this space will be taken up progressively by end-user occupiers in the coming quarters. We believe that demand for space comes on the back of consolidation of operations to achieve operational efficiency is one of the key drivers for space in the industrial sector. Hence, we expect the increased take-up in the single-user factory space to be at the expense of higher vacancy rates emerging from existing multi-user factory space, which some of the endusers are expected to vacate. However, take-up should start to pick up in 2018 if the continued expansion in manufacturing activities is seen. Supply Year of consolidation in 2017; stabilisation in The industrial market is at the tail-end of a spike in supply completions starting from 2014 and peaking in As such, landlords are typically still facing an increasingly competitive operating environment, but that should start to abate in 2018 when competition from new supply starts to abate. That said, we view that 2018 will be a year of stabilisation, given expectations that the hike in new supply in 2017 will need time to be absorbed. Based on the latest Jurong Town Corporation (JTC) statistics, a total of 4.4m square metres (sqm) equivalent to 46.5m square feet (sqft) of new industrial space is either under construction or in planning and projected to complete over the next four years, from Of this, more than 70% of the space will be completed and operational by the end of Among industrial types, the single-user factory space will see close to 1.7m sqm increase in new supply representing a c.7% increase, the multi-user factory space will see close to 1.5m sqm of new supply (c.14% increase), followed by the warehouse space at c.9% (or close to 0.9m sqm). The business park space will add another 0.2m sqm. However, most of the space is pre-committed. Forecasts Industrial sector s overall vacancy rates to increase to 10-11% by 2017; bottoming out from 2018 onwards. Taking into account assumed pre-commitment rates and projected new demand, and faced with an increasing supply outlook, the average vacancy rate is now 11.3% (as of the 2017 second quarter) and we expect further weakness until the end of 2017, before it bottoms out from 2018 onwards. As the influx and pace of completions are skewed over , we believe that, on average, spot rentals are likely to see downside to the tune of 5% in 2017, with the exception of business park space, which we believe will be resilient with around 0-3% growth. We expect rentals across most sectors (industrial, warehouse and business parks) to start turning up in Supply tapering down from 2018F onwards m sqft F 2018F 2019F Source: JTC, DBS Bank Supply Demand 1. A drop-off in supply in 2018 will ease pressures from industrial REITs. Downward pressures to rentals and occupancy rates are expected to taper off in the medium term. (some parts had number points starting some didn t have but I think the other industry sections had a number points) Page 56

57 Net Absorption remain negative but significant improvement from 2018F m' sqft % 10.6% 10.3% % 9.4% 9.7% % F 2018F 2019F (2.0) (4.0) (6.0) 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 1. Net absorption is projected to turn positive in 2019F. (8.0) Source: JTC,DBS Bank Net Absorption Rate Market Vacancy Rate (%) 5.0% Rental reversion trend to remain negative over % 40% 30% 20% 1. Rental reversion trends are expected to turn from flattish to negative from 2016 onwards. 2. The factory and warehouse space is expected to see a larger drop in rental reversions. 10% 0% -10% -20% F 2018F Business Park Warehouse Factory 3. Business park space is expected to buck the trend, given expectations of a 3% per annum rise in market rents in 2016; flat in Source: JTC,URA, DBS Bank Page 57

58 Industrial Sub-sector Multi-User Factory Multi-user factory supply: Supply spike in 2016 to be an overhang 1. Supply completions to spike in ; resulting in vacancy rates increasing to more than 14%. Source: JTC, URA, DBS Bank Potential shadow space from single-user factory space might result in increased competition for tenants Million Sqft 2. However, we see risk emerging from the shadow space arising from the singleuser factory segment if end-users decide to sub-lease part of their space (bottom chart). 3. Rentals are expected to remain under pressure as competition heats up. We project a 5% drop over 2017 followed by a more modest 3% fall in F 2018F 2019F Multi-User Space Potential Shadow space from Singer-User Factory segment Source: JTC, URA, DBS Bank Multi-user factory: Occupancy and rental rates to dip 1. Multi-user factory rents expected to decline 5% in Occupancy rates projected to dip to 85% and rebound. Source: JTC, URA, DBS Bank Page 58

59 F 2018F 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Industry Focus Industrial Sub-sector Warehouse Warehouse: Oversupply situation to persist until 2018 m Sqft % 10% 8% 6% 4% 2% Supply under construction remains one of the highest among industrial subsectors with a majority of new space mainly due to firms consolidating their space F 2018F 2019F Supply Demand Vacancy Rates 0% Source: JTC, URA, DBS Bank Warehouse: Occupancy to dip below 90% S$ psf pm 95% 94% 93% 92% 91% 90% 89% 88% 87% 86% 85% Warehouse rents expected to decline 3-5% in 2017 and rise by 3% in 2018 Occupancy rates projected to dip below 90% going forward. Rental (LHS) Occupancy (%) (RHS) Source: JTC, URA, DBS Bank Page 59

60 Industrial Sub-sector Business Parks Majority of business park space has been pre-committed '000 sqft Global Financial Crisis ( ) Eurozone Crisis (2012) 100% 95% 90% The sector is expected to see minimal increase in supply, which will be supportive of rental rates going forward. We believe that the high vacancy in the market can be absorbed slowly over time % % - (0.01) F 2018F 2019F 75% 70% Demand for Private Business Park Supply for Private Business Park Occupancy Rate (%) Source: JTC, URA, DBS Bank Business parks: Rental differential currently above historical averages (chart seems out of date maybe just remove given shortage of time) 20 (S$ 18 psf/mth) Business park rents (off-central and rest of Island) tend to be at 50% and 60% discounts respectively to Grade A offices. Current differential is above the historical average, but the softening outlook for central business district office rents caps further upside. Grade A Office Business Park - Rest of Island Business Park - Off Central Source: JTC, URA, DBS Bank Page 60

61 8 Retail subsector outlook: Tough Times have yet to pass Key Points Cautious on the outlook as consumer demand remains weak in the midst of e-commerce impact. Supply spikes in to put further pressure on rental and occupancy. Cap rates however to remain tight given ample liquidity environment coupled with lack of investable assets. Still cautious on Singapore's retail sector (what downgrade?). Signs of rental stabilisation in Central Area have emerged - after ten consecutive quarters of decline, rental rates appear to have stabilised. We believe it is still premature to draw a conclusion but this has shed a positive light while we continue to monitor the rental trend. 8.1 Trends, demand and supply outlook Demand Still weak, tempered by stagnant consumption growth. Landlord balancing occupancy rate with rental. Despite strong take-up rates in recently completed malls (e.g. Waterway Point opened with 95% occupancy), island-wide net absorption has been marginal since 2015 and at the expense of rental. As of September 2017, shop occupancy rate across the country had fallen to 91.7%, from the high of 95.5% in Landlords have been taking different approaches in balancing occupancy and rental rates. Occupancy at Frasers Centrepoint Trust mall has been lingering around % this year from the average of 96.5% in Although occupancy for CapitaLand Mall Trust was higher and more stable at around 98-99%, the portfolio had registered its first quarter of negative rental reversion of -2.3% in 1Q17 since the REIT s IPO, while the reversion rates of the following two quarters were also in the red, though to a lesser extend at low decimals. The reversion rates were significantly below the average of c.6% over the past few years, and the lowest since Supply Supply spikes in 2018 and 2019 will put further pressure on rental and occupancy. In 2013 and 2014, Singapore saw its largest influx of retail space since 2006 and the market is still managing to fully absorb the new supply, which resulted in a continuous decline in occupancy rate. Recent and new supply has been largely located outside the central region, reflecting that the government s push towards the live-work-play initiative in regional hubs is bearing fruit. After three years of limited supply from , 2018 and 2019 will see another spike of completions looming, stemming from three key projects: Changi Jewel, Paya Lebar Quarter and Northpoint City. The expectation of a laggard absorption rate will continue to put pressure on rental and occupancy. As we unveil 2018, the more resilient malls in the suburbs will become evident. Retail market summary Key indicators (shop space) On-quarter change 2Q2017 3Q2017 Price index (4Q1998=100) -0.8% Rental index (4Q1998=100) 0 % Potential supply (sqm GFA) -2.1% 425, ,760 Vacancy rate 0 ppt 8.3% 8.3% Source: URA, CEIC, DBS Bank Page 61

62 Key Developments in 3Q17: Completions of Marian One and Duo Tower (Central). Marina One resides in downtown, an area where retail space is not densely occupied. Duo Tower is in Bugis, a busy retail hub, but as the complex is primarily for office use, the net impact of its ancillary retail space on the area will be muted. Century Square (East) goes under renovation for a year. This could cause some disruption in the Tampines area as a significant temporary reduction in the retail space may benefit Tampines Mall and Tampines 1. The completion of DTL3 makes the retail area at Clarke Quay and the Expo more accessible, and this could disrupt the shopping pattern in Singapore. Impact Uneven, shoppers will favour comprehensiveness and diversity in offerings. Retailers have been hit by several factors: (a) declining sales efficiency (revenue per square foot), as a result of leakage from residents travelling abroad; (b) manpower shortage due to restrictions on foreign labour; (c) rising labour costs from minimum wage policies, and (d) stagnant consumption growth as confidence still needs to be built. We believe the impact of retail headwinds will not be felt evenly across all malls. In order to outperform, we think a mall needs to be well located with comprehensive and diversified offerings. Net absorption of retail supply and occupancy rate 1. Following spikes in net additions of shop space over , net absorption has been marginal since 2015 as landlords take more time to fill up the space in recently completed malls 2. We expect net absorption to continue to fall going forward, as retailers consolidate their operations and more supply come up in the next two years Source: Urban Redevelopment Authority, DBS Bank Page 62

63 Property rental index (shop) 1. Rents in the Central Area have been weakening at a faster pace than rents in the fringe area in the last two years 2. Rental index in the Central Area has fallen around 20% from the peak in June 2008 and around 16% from December However, signs of stabilisation have started to emerge while Fringe Area rentals continue to decline. 3. Rental indices have fallen to the level last seen in 2010; we do not expect recovery to be imminent as supply has crept up after 2010 while occupancy remained on the downtrend Source: URA, CEIC, DBS Bank Property median rental (shop) 1. In Orchard, median rental in nominal terms is at the 2007 level 2. In comparison, the rates of decline in City Fringe and OCR are lower 3. Having said that, rentals in Orchard have started to show signs of stabilisation, whereas OCR continues to decline Source: URA, CEIC, DBS Bank Page 63

64 Key trends Moving to the outskirts. The retail experience for locals will be an increasingly suburban affair. The majority of shopping mall completions in the past year have been located in the suburbs: One KM in Tanjong Katong, Big Box in Jurong East, Paya Lebar Square in Paya Lebar and Seletar Mall in Seletar, for example. Looking ahead, new retail space will still be largely focused in the suburbs. Waterway Point in Punggol opened in January 2016, and Northpoint City in Yishun (2018) and Changi Jewel (2018) are among the largest suburban developments in the pipeline. Just as we have seen in Jurong East, the government has been actively encouraging the continued development of regional centres in decentralised areas as key working and leisure destinations, as a means of relieving the congestion in the central business district and Orchard Road. As a result, we have seen many retailers that were previously only in the Orchard Road area moving into suburban shopping malls to directly cater to residents living in those areas. Examples include Zara, Coach, Kate Spade and Isetan. Historical net additions to shop space - Suburban retail stock (Outside Central) has been growing at a faster pace 1. Retail shop supply additions in recent years have been mainly in the Outside Central Region ( ; OCR, dark grey columns) 2. In the OCR, major completions since 2013 include Westgate, JEM, Sports Hub, One KM, Seletar Mall, Paya Lebar Square, Big Box and Waterway Point Source: URA, CEIC, DBS Bank Page 64

65 Upcoming retail developments by planning region (416,760 sqm of gross floor area 1. New retail supply will be heavily skewed to the suburbs (OCR) 2. This is in line with the government s strategy of decentralising and creating regional work, live, play hubs 3. A large proportion of OCR retail supply will be in the East Region (i.e. Changi Jewel) 4. New supply of Downtown Core is concentrated in Funan Redevelopment (2019) and addition/alterations to Raffles Hotel s shopping arcade (2020). Source: URA, CEIC, DBS Bank Chart 7: Upcoming retail space supply by expected year of completion and region 1. Most of the pure-play retail supply had already entered the market in Going forward, most of the supply will be part of mixed-use developments (i.e. including both office and retail, and possibly hotel component) 2. Key supply will come from Northpoint City in Yishun (North, OCR), Paya Lebar Quarter (Fringe, Central) and Changi Jewel in Changi (East, OCR), all slated for completion in 2018 (grey bar) Source: URA, CEIC, DBS Bank Page 65