Property - Overall Stay in the game

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1 NAVIGATING SINGAPORE December 13, 2017 Property - Overall Stay in the game Kicking tyres in the en-bloc market Expect robust residential demand in 2018 Office sector continues to shine Hotel sector has upside risk potential Analyst(s) LOCK Mun Yee T (65) E munyee.lock@cimb.com YEO Zhi Bin T (65) E zhibin.yeo@cimb.com IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. Powered by the EFA Platform

2 TABLE OF CONTENTS Overweight on developers, Neutral on REITs... 5 Three themes for Valuation and recommendation... 8 Developers - A year of reinvestment and execution... 9 S-REITs resume running on twin legs Residential Office Retail Industrial Hospitality Company Briefs

3 Sector Note Singapore Overweight (no change) Highlighted companies City Developments ADD, TP S$13.15, S$12.31 close Singapore and overseas residential earnings to underpin CIT s near-term growth. Resumption of land banking in Singapore should underpin RNAV expansion. Frasers Logistics & Industrial Trust ADD, TP S$1.20, S$1.11 close We favour FLT as one of our core holdings. Exposure to favourable Australian industrial property. Ability to tap sponsor pipeline a driver to growth. UOL Group ADD, TP S$9.62, S$8.64 close UOL has a high recurrent income base, from rentals, hotels and investment holdings. It has good office exposure through UIC. The stock is trading at 26% discount to RNAV. Frasers Centrepoint Trust ADD, TP S$2.38, S$2.24 close We like FCT for its exposure to stable nondiscretionary retail. Robust earnings growth to resume with the completion of its asset enhancement at Northpoint North Wing. Far East Hospitality Trust HOLD, TP S$0.69, S$0.71 close We believe that FEHT is highly likely to acquire sponsor s Oasia Hotel Downtown by year-end. We understand that the asset has stabilised and likely lean towards debt to fund acquisition. Summary valuation metrics P/E (x) Dec-17F Dec-18F Dec-19F City Developments UOL Group Far East Hospitality Trust Frasers Centrepoint Trust Frasers Logistics & Industrial Trust P/BV (x) Dec-17F Dec-18F Dec-19F City Developments UOL Group Far East Hospitality Trust Frasers Centrepoint Trust Frasers Logistics & Industrial Trust Property - Overall Stay in the game Ground checks on the en-bloc market found robust replacement appetite. Residential demand strength to continue into Office sector continues to shine. Hotel sector has upside risk potential. Maintain Overweight on developers, Neutral on REITs. Our preferred picks are UOL, CIT, FCT, FLT and FEHT. Kicking tyres on the en-bloc ground After the run-up in property stocks in 2017 aided by a buoyant en-bloc market, we did onground checks across nine en-bloc projects to determine the underlying strength of residential replacement demand as well as the wealth creation effect from the unlocking of capital. Our study found that sellers remain prudent, with 87% of our sample buying a replacement unit, budgeting 40-70% of their sale proceeds for it, and keeping the remainder largely as savings or boosting their lifestyle, i.e. more travelling. Expect robust residential demand to continue into 2018 The findings above show that replacement appetite would help to underpin demand in the coming year, in addition to organic household formation and upgrade appetite. We estimate private home demand to reach 11,000-12,000 in 2018 against potential launch of 10,000 units. We project private home prices to rise by up to 5% in The anticipated high take-up rate should continue to propel property stocks to outperformance, in our view. Office sector continues to shine The office sub-sector continues to show the most supportive supply/demand dynamics for a rental recovery. In addition, economic growth has broadened to the services sector, another positive sign for potential demand for office space. Overall new supply totalled 1.2m sq ft annually between , though new CBD supply is limited. We project rents to rise by up to 10% in As the share prices of office REITs have run up, we prefer to have office exposure through landlords such as UOL. Upside risks for hotel sector The hotel industry was in the doldrums over the past three years due to an overhang from incoming supply. With new hotel room additions projected to average 1.7% in 2018 and our expectations of tourist arrivals growing 3% p.a., we see room for upside surprise in the hotel sector, with a more meaningful rate uplift towards 2H18. We now project a stronger revenue per available room (RevPAR) growth of 5% in 2018 vs. 3% previously. FEHT is our preferred pick in the sector as it had been a relative valuation laggard. Maintain Overweight on developers, stay Neutral on REITs We retain our preference for developers. On the back of a property market recovery, we anticipate developers with more Singapore exposure such as UOL and CIT to continue outperforming. Within the S-REITs space, we prefer FCT and FLT given their stronger earnings growth profile. While FEHT is at present a Hold, we think investors who take a medium-term view of potential accretive acquisition upside surprise could be rewarded. Downside risks to our rating include a slower-than-expected property market recovery. Dividend Yield Dec-17F Dec-18F Dec-19F City Developments 1.39% 1.60% 1.80% UOL Group 1.64% 1.64% 1.64% Far East Hospitality Trust 5.70% 5.83% 6.11% Frasers Centrepoint Trust 5.37% 5.57% 5.67% Frasers Logistics & Industrial Trust 6.42% 6.58% 6.81% Insert Analyst(s) LOCK Mun Yee T (65) E munyee.lock@cimb.com YEO Zhi Bin T (65) E zhibin.yeo@cimb.com Figure 1: Summary of our en-bloc survey results Age group Buy a replacement unit Buy an investment unit Investments into nonreal estate products Others (lifestyle and other uses) x x x *Note: = All Yes, X = All No, Items in red denote mixed responses SOURCES: CIMB RESEARCH IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFACustomEntityStatement Powered by EFA Platform

4 Figure 2: Singapore developers' peer comparison table Company Bloomberg Price Tgt Px Mkt Cap Core P/E (x) RNAV Prem./(Disc.) P/BV (x) Div. Yield (%) Recom. Ticker (lc) (lc) (US$ m) FY17F FY18F FY19F FY17F to RNAV (%) FY17F FY18F FY17F FY18F Aspen (Group) Holdings Ltd ASPEN SP Add % % 4.8% CapitaLand CAPL SP Add , % % 2.6% City Developments CIT SP Add , % % 1.6% Frasers Centrepoint Ltd FCL SP Add , % % 4.1% Global Logistic Properties GLP SP Hold , % % 1.7% Guocoland GUOL SP Add , % % 3.2% Hatten Land Ltd HATT SP Add % % 1.3% Ho Bee Land HOBEE SP Add , % % 3.3% Hongkong Land Holdings Ltd HKL SP Add , % % 2.9% Perennial Real Estate Holdings PREH SP Add ,072 na % % 0.3% UOL Group UOL SP Add , % % 1.6% Wing Tai Holdings WINGT SP Add , % % 2.6% Singapore average % % 2.4% Figure 3: Singapore S-REITs' peer comparison table SREIT Bloomberg Ticker Price as at 13 Dec 17 Mkt Cap (US $m) Last reported asset leverage SOURCE: CIMB RESEARCH, COMPANY Rec. Hospitality Ascott Residence Trust ART SP $1.21 $1, % $1.16 H 5.9% 6.1% 6.1% Ascendas Hospitality Trust ASCHT SP $0.88 $ % NA NR 6.5% 6.6% 7.0% CDL Hospitality Trust CDREIT SP $1.66 $1, % $1.62 H 5.1% 6.0% 6.2% Far East Hospitality Trust FEHT SP $0.71 $ % $0.69 H 5.7% 5.8% 6.1% Frasers Hospitality Trust FHT SP $0.76 $1, % NA NR 6.6% 6.8% 6.8% OUE Hospitality Trust OUEHT SP $0.83 $1, % $0.84 A 6.1% 6.1% 6.4% Simple Average 34.4% % 6.2% 6.4% Industrial AIMS AMP AAREIT SP $1.43 $ % NA NR 7.8% 7.5% 7.7% Ascendas REIT AREIT SP $2.70 $5, % $2.72 H 5.8% 5.9% 6.1% Cache Logistics Trust CACHE SP $0.85 $ % $0.79 H 8.6% 7.9% 7.8% ESR-REIT EREIT SP $0.56 $ % $0.57 H 7.1% 7.2% 7.7% Frasers Logistics & Industrial Trust FLT SP $1.12 $1, % $1.20 A 6.4% 6.5% 6.8% Keppel DC REIT KDCREIT SP $1.42 $1, % $1.37 H 5.2% 5.3% 5.4% Mapletree Industrial Trust MINT SP $2.03 $2, % $1.94 H 5.6% 5.6% 6.1% Mapletree Logistics Trust MLT SP $1.31 $2, % $1.21 H 5.7% 6.0% 6.4% Sabana Shariah SSREIT SP $0.46 $ % NA NR na na na Soilbuild Business Space REIT SBREIT SP $0.66 $ % NA NR 8.5% 7.4% 7.1% Viva Industrial Trust VIT SP $0.96 $ % NA NR 7.7% 8.0% 7.4% Simple Average 35.1% % 6.7% 6.9% Office CapitaLand Commercial Trust CCT SP $1.89 $5, % $1.68 H 4.3% 4.5% 4.5% Frasers Commercial Trust FCOT SP $1.45 $ % $1.46 H 6.8% 6.8% 6.8% Keppel REIT KREIT SP $1.24 $3, % $1.20 H 5.4% 5.5% 5.5% OUE Commercial REIT OUECT SP $0.72 $ % $0.68 H 6.6% 6.3% 6.3% Suntec REIT SUN SP $2.07 $4, % $1.83 R 4.8% 4.8% 4.8% Simple Average 36.1% % 5.6% 5.6% Retail CapitaLand Mall Trust CT SP $2.12 $5, % $2.15 H 5.1% 5.0% 5.1% Frasers Centrepoint Trust FCT SP $2.21 $1, % $2.38 A 5.4% 5.6% 5.7% Mapletree Commercial Trust MCT SP $1.60 $2, % $1.75 A 5.4% 5.5% 5.6% SPH REIT SPHREIT SP $1.03 $1, % $1.06 H 5.4% 5.5% 5.5% Starhill Global REIT SGREIT SP $0.77 $1, % $0.83 H 6.4% 6.6% 6.7% Simple Average 32.2% % 5.6% 5.7% Retail Ex-Sin CapitaLand Retail China Trust CRCT SP $1.66 $1, % NA NR 6.3% 6.5% 6.9% Lippo Malls Indonesia Retail Trust LMRT SP $0.42 $ % $0.43 H 8.7% 8.5% 8.5% Mapletree Greater China Commercial Trust MAGIC SP $1.19 $2, % $1.20 H 6.2% 6.2% 6.3% Simple Average 35.3% % 7.1% 7.2% Healthcare First REIT FIRT SP $1.40 $ % $1.39 H 6.1% 6.5% 6.5% Parkway Life REIT PREIT SP $2.85 $1, % $2.93 H 4.8% 4.4% 4.5% RHT Health Trust RHT SP $0.82 $ % $0.92 H 7.3% 5.9% 7.0% Simple Average 31.0% % 5.6% 6.0% Last stated NAV Price / Stated NAV Target Price (DDMbased) FY17F Yield FY18F Yield FY19F Yield SOURCE: CIMB RESEARCH, COMPANY 4

5 Stay in the game Overweight on developers, Neutral on REITs We see 2018 as a turnaround year for the physical property sector in Singapore as it moves past the wall of oversupply brought about by over-investment in prior years. Fuelled by broadening economic growth and reduced supply drags, private residential prices should revert to a firmer uptrend, and office rents and hotel room rates should recover, in our view. That said, while we remain positive on the sector, we think the outperformance of property developers and S-REITs in 2017 may have priced in some of this recovery and hence we would be relatively more stock selective at this point. We maintain our Overweight stance on property developers as we believe the sector may still have legs to run, underpinned by attractive valuations and robust demand. The sector is now trading at 32% discount to RNAV, which is still below its long-term mean discount. We project the residential sector to be propelled by still-strong developer reinvestment activities, aided by strong balance sheets, as well as the resumption of asset turn through more new launches. We expect end-buyer demand to remain robust, aided by new household formation and enbloc replacement demand. As office rents recover and negative reversion spread narrows, improved earnings outlook will also underpin the developers office portfolio value, thus supporting RNAV growth. We expect S-REITs earnings to resume its northward trajectory on organic and inorganic prospects from 2018, based on our projection of a 2.2% sector DPU growth. Furthermore, with lower cost of capital, S-REITs are poised to tap new inorganic growth prospects, which have not been factored into our existing estimates. However, given the sector's FY18 yield of 5.6%, normalising to slightly above mean, and the prospect of incremental rate hikes, we retain our Neutral rating for now. 5

6 Three themes for 2018 Residential spinning the en-bloc wheel of fortune We anticipate the share price performance of property developers to be fuelled by strong end-buying demand momentum while investments into new land bank and deployment of balance sheet capacity continue to provide uplift to RNAVs. Historically, the sector's share price outperformance, as evidenced by the FSTREH index, tracks fairly closely to residential sales momentum and take- up rates. Our correlation back-test, using annual sales, take-up rates and launch data since 1999, show that property stocks are most highly correlated to take-up rates, at 79% correlation, followed by sales volume at 68% correlation, and a much slimmer 59% for new launches. Based on our expectation of 10,000 units of new launches and volume demand of 11,000-12,000 for 2018, we project take-up rates to remain high in As such, we believe property developer stocks would continue to be in demand. Our top picks for developers are UOL (Add, TP S$9.62) and City Dev (Add, TP S$13.15), both of which have upcoming Singapore residential launches that could benefit from the ongoing buying momentum. Figure 4: FSTREH vs. new launches, sales and take up rates Launch (LHS) Sold (LHS) URA PPI (indexed) FSTREH (indexed) Take up rate (%) SOURCE: CIMB RESEARCH, URA, BLOOMBERG Office continues to shine Amongst the various property sub-sectors, the office segment shows the most supportive supply/demand dynamics for a rental recovery. New supply over should average 1.2m sq ft annually, in our estimate. However, CBD supply would be much lower at 0.65m sq ft p.a. over the same period. This will be supportive of CBD office rents. We project office rents to rise by up to 10% in 2018, largely led by centrally located office properties. As the share prices of office S-REITs have run up significantly, we prefer to have office exposure via landlords such as UOL. We like KREIT s (Hold, TP S$1.20) premium office portfolio and would be a buyer on share price weakness. Upside risk to hotel recovery We think there is upside risk to the hotel recovery story. The hotel industry was in the doldrums over the past three years with RevPAR declines even as tourist arrivals continued to grow. This was partly a function of changing profile of tourists as well as higher than average supply of new hotel rooms coming onstream over Looking ahead, we expect new hotel room completions to decline to 1.7% of total stock in 2018 (vs. an estimated 4% in 2017). Meanwhile, visitor arrivals continue to be healthy -- we forecast growth of 3% in Against this demand and supply backdrop, we have raised our RevPAR projections to +5% for 2018 (against our previous assumption of +3%). We believe the scope for rate recovery could be more meaningful towards 2H18. FEHT (Hold, TP S$0.69) is our preferred pick in the sector as it had been a 6

7 relative valuation laggard. Potential acquisition of the Oasia Hotel Downtown could provide more upside to our current earnings estimates and target price for FEHT. 7

8 Valuation and recommendation We retain our preference for developers (Overweight) over S-REITs (Neutral). Against the backdrop of a Singapore property market recovery, we anticipate developers with more Singapore residential and commercial exposure to continue outperforming. Our top developer picks are UOL and City Dev for Singapore residential exposure with catalyst coming from new upcoming launches. For S-REITs, we like FCT and FLT and take a medium-term view on FEHT in view of its potential acquisition upside surprise. UOL (Add, TP S$9.62) UOL is our top pick among developer stocks. Its residential and commercial property portfolio is predominantly focused in Singapore. UOL has become a major office landlord post consolidation of UIC s earnings. Together, they own a total of 5.69m sq ft of office and retail space in Singapore, located in both the CBD and city fringe areas. This put the group in a good position to benefit from the office sector recovery. On the residential front, it has c.729 attributable residential units that could be launched from These sites were acquired mainly in 2H16 before the run-up in land prices. Our TP of S$9.62 is pegged to a 20% discount to RNAV. Potential corporate exercise for its 49.8%-owned associate UIC may provide additional catalyst for share price performance. City Developments (CIT, Add, TP S$13.15) CIT is the bellwether property stock in Singapore. It is trading at an attractive 24% discount to RNAV of S$ The group has locked in c.s$1.76bn worth of total residential sales in 9M17. It plans to launch three projects totaling 1,175 units in 1H18. Recent acquisition of the Amber Park en-bloc site has potentially increased its total residential inventory to c.1,800-1,900 units. In Dec 2017, the group announced an offer to buy the remaining 34.8% of Britain's Millennium & Copthorne Hotels (M&C) it does not already own for 6.20/share. When completed, we anticipate the deal to further accrete CIT s RNAV given that the offer price is below M&C s book value. CIT's balance sheet remains strong with debt-to-equity ratio of 0.13x as at end-3q17 and should remain low even after factoring in the funding required to complete the M&C and Amber Park deals. Our target price of S$13.15 is pegged to a 20% discount to RNAV. Frasers Centrepoint Trust (FCT, Add, TP S$2.38) We continue to like FCT for its exposure to the more stable non-discretionary retail segment. We believe the trust will continue to deliver robust earnings growth as it has moved past the peak of asset enhancement initiative (AEI) at Northpoint North Wing. The latter is 95% leased, with average rents tracking 9% higher post renovation. The stock is trading at projected % FY18-19 DPU yield, based on our estimates. Frasers Logistics and Industrial Trust (FLT, Add, TP S$1.20) We continue to favour FLT as one of our core REIT holdings. In addition to exposure to the favourable Australian industrial property dynamics, its ability to tap its sponsor s Australian development pipeline, in an increasingly low availability environment of prime assets in Australia, would enable it to deliver inorganic growth over the medium term. The stock is trading at % FY18-19 DPU yield, based on our forecast. Far East Hospitality Trust (FEHT, Hold, TP S$0.69) FEHT is our preferred pick amongst hotel S-REITs as it is a relative valuation laggard. It is trading at 0.79x P/BV vs. CDREIT and OUEHT's c x P/BV. Although currently a Hold, investors with a strong view that an accretiveacquisition of Oasia Hotel Downtown could occur soon could add the stock before the fact. Given FEHT's present low gearing of 32.1% as at end-3q17, we believe this acquisition could be potentially more debt-funded, thus making it more accretive to bottomline. 8

9 Developers - A year of reinvestment and execution If 2017 can be seen as a year of reinvestment for developers, then 2018 would be a year of reinvestment and execution as developers begin to asset turn their land inventory, in addition to buying land. We think it will be another year of outperformance for property stocks, particularly those with launch-ready projects that could be rolled out over the next 12 months. Outperformance of property developer stocks Property stocks have been on the rise this year, clocking a 28.7% YTD total return against 24.9% for S-REITs and outperforming the 23.3% total returns for the broader FSSTI Index. This was due to low valuations, further fuelled by growing signs of a property market recovery, especially in the office and residential sectors. as valuations normalise Property stocks are currently trading at a 32% discount to RNAV, still at midway between mean and -1 s.d. discount to mean. However, we note that RNAVs have been adjusted over time. To assess how much of the stocks performance were due to valuation normalisation, we compare current share prices to the trough RNAV in Jul Comparing these two points shows us that property stocks would have been trading at a 21% discount to the Jul 16 RNAV i.e. if RNAVs had not changed. This is at the long-term mean discount level and indicates that much of the run-up in share prices from Jul 16 to Dec 17 was due to a normalisation to long-term valuations. In terms of price-to-book ratio, developers are trading at 0.87x P/BV. Figure 5: Sector discount to RNAV 60% Figure 6: Sector P/BV % 20% % -20% -40% % % M-90 J-92 N-93 S-95 J-97 M-99 M-01 J-03 N-04 S-06 J-08 M-10 M-12 J-14 O-15 J-17 SOURCE: CIMB RESEARCH, BLOOMBERG, COMPANY 0.0 J-90 F-92O-93 J-95 F-97O-98 J-00 F-02O-03 J-05 F-07O-08 J-10 F-12O-13 J-15 D-16 SOURCE: CIMB RESEARCH, COMPANY, BLOOMBERG Improved earnings visibility from extending land bank Developers are expected to enjoy improved earnings visibility over the next few years thanks to the recent landbanking exercises. After the recent bout of buying, we believe some developers should have enough stock for an estimated 1-2 years worth of new launches, i.e. City Dev (Add, TP S$13.15), UOL (Add, TP S$9.62), Oxley Holdings (Non-rated, S$0.615), and Chip Eng Seng (Non-rated, S$0.935). This would likely enable them to leverage on the rising residential prices and extend their earnings visibility when these projects are launched. This could likely act as share price catalysts. 9

10 Figure 7: Estimated unlaunched sales inventory of major developers as at Dec 2017 Company Stake Total units City Dev New Futura 100% 124 South Beach Residences 50% 190 Tampines Ave 10 (Parcel C) 100% 861 Amber Park enbloc (est) 80% 700 Total 1,875 UOL Raintree Gardens 50% 729 Amber Rd 100% 140 Nanak Mansion enbloc 50% 180 Total 1,049 Wing Tai Serangoon North Ave 1 40% 505 FCL Jiak Kim St 100% 525 Oxley Rio Casa enbloc 35% 1,472 Serangoon Ville enbloc 40% 1,052 Mayfair Gardens enbloc (est) 100% 350 Total 2,874 Allgreen Crystal Tower enbloc (est) 100% 104 Royalville enbloc (est) 100% 257 Fourth Ave 100% 445 Total 806 Chip Eng Seng Woodleigh Lane 60% 735 Changi Garden enbloc (est) 100% 320 Total 1,055 Guocoland Wallich Residences 80% 162 SOURCE: CIMB RESEARCH, COMPANY Balance sheets remain robust The net debt to total equity ratios of property developers remain well below 1x as at end-3q17. We believe that even after factoring in the remaining funding costs for land acquisitions, their net gearing levels should likely remain healthy. This puts them in a good position to continue reinvesting for growth. Figure 8: Gearing levels of major developers as at 3Q17 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% CAPL CIT FCL GUOL HOBEE UOL WING TAI SOURCE: CIMB RESEARCH, COMPANY 10

11 VIT KREIT MAGIC MLT* OUEHT SBREIT AAREIT PREIT SUN EREIT MCT SSREIT CACHE* SGREIT OUECT FCOT MINT* CCT* CRCT* CDREIT MUST* KDCREIT AREIT ASHT FIRT FEHT FHT ART CT FLT FCT LMRT RHT SPHREIT Navigating Singapore Property - Overall December 13, 2017 S-REITs resume running on twin legs S-REITs has also had a good run YTD, recording a 24.9% total return YTD. Valuations have reverted to mean with the S-REIT sector delivering FY17F dividend yield of 5.5% and P/BV of 1.07x. The sector s strong performance was due to narrowing of yield as the 10-year bond yield compressed from 2.4% in the beginning of 2017 to 2.1% in Dec and narrowing of yield spread from 430bps at the start of the year to 340bps currently. Figure 9: S-REIT sector s dividend yield 14% Figure 10: S-REIT sector s P/BV % 10% SD: 1.25x 8% -1SD: 7.7% 1.0 Ave: 1.03x 6% Ave: 5.8% 0.8-1SD: 0.81x 4% +1SD: 4.0% 0.6 2% M-04 J-05 N-06 M-08 J-09 N-10 M-12 J-13 N-14 M-16 J-17 S-REIT yield SOURCE: CIMB RESEARCH, COMPANY, BLOOMBERG 0.4 M-04 J-05 N-06 M-08 J-09 N-10 M-12 J-13 N-14 M-16 J-17 P/BV SOURCE: CIMB RESEARCH, COMPANY, BLOOMBERG Figure 11: S-REITs projected DPU growth S-REITs, on the whole, delivered fairly stable results for 9M17 as rental growth performed in line with our expectations, augmented by inorganic growth drivers. We project S-REITs to deliver FY17F DPU growth of -0.7% compared to the +1.8% in FY16. The dip was likely due to the adverse impact of negative rental reversions in office and industrial sectors, weaker hospitality performance, income vacuum from asset enhancement initiatives and asset sales, partly offset by contributions from new acquisitions and divestment gain payouts. Moving forward, we project S-REIT DPU to expand by 2.2% in 2018 and 2.1% in 2019, led by full-year contributions from new acquisitions made in 2017, the completion of asset enhancement exercises, as well as positive rental momentum as the oversupply concerns dissipate. Aggregate leverage ratio stood at 33% at end-3q17 and we expect it to remain in the 33-35% range, even after taking account the acquisitions completed post- 3Q17. Given the strong market liquidity and robust investor appetite, most acquisitions were accompanied by some component of equity fund-raising, which kept leverage low. Figure 12: S-REITs aggregate leverage ratio (at end-3q17) 2.5% 2.0% 1.8% 2.2% 2.1% 45% 40% 35% Average: 33% 1.5% 30% 1.0% 25% 0.5% 20% 15% 0.0% 10% -0.5% -1.0% -0.7% FY16 FY17 FY18f FY19f DPU growth 5% 0% * post 3Q17 11

12 SOURCE: CIMB RESEARCH SOURCE: CIMB RESEARCH, COMPANY S-REITs are well hedged against the rising interest rate environment, with c60-99% of their debt on fixed rates. Debt maturity profile average 3 years, thus providing good visibility on potential credit cost pressures. Figure 13: S-REITs debt profile REIT Office Total asset (S$m) Total debt (S$m) Gearing Cost of debt Ave. debt maturity (yrs) % fixed debt Interest cover (x) CCT % 2.7% % 5.1 FCOT % 3.1% % 4.1 KREIT % 2.6% % 4.4 SUN % 2.6% % 4.0 OUECT % 3.5% % 3.2 Retail CT % 3.2% 4.8 na 4.8 FCT % 2.3% % 6.9 MCT % 2.7% % 4.9 SPHREIT % 2.8% % 6.3 SGREIT % 3.1% % 4.1 Industrial AREIT % 2.9% % 5.9 CACHE % 3.5% % 4.0 EREIT % 3.7% % 3.6 FLT % 2.8% % 8.3 KDCREIT % 2.2% % 10.6 MINT % 2.9% % 7.2 MLT % 2.3% % 5.6 Hospitality ART % 2.4% % 4.6 CDREIT % 1.8% % 7.2 FEHT % 2.5% % 4.3 OUEHT % 2.8% % 4.5 Healthcare FIRT* % c.4.1%-4.2% c % 5.5 PREIT % 1.1% 2.9 na 11.2 RHT % 6.2% na 57.2% 5.9 Overseas-centric S-REITs LMRT % na % 4.3 MAGIC % 2.7% % 3.9 Total/ave % 2.9% % 5.5 SOURCE: CIMB RESEARCH, COMPANY Outlook for 2018 We maintain our Neutral stance on S-REITs in 2018 and adopt a bottom-up approach to stock picking, preferring S-REITs with visible organic/inorganic growth drivers and attractive valuations. Our top picks are FCT and FLT and we see upside potential for FEHT should the earnings-accretive acquisition of Oasia Hotel Downtown occur. Interest rate recalibration to be orderly Our fixed income strategists indicated in CIMB s macro and strategy outlook report titled 2018: Sensibilities at the exit queue on 17 Nov 2017 that 2018 will continue to witness the withdrawal of easy monetary policy through both the interest rate and QE mechanisms as the US FOMC, ECB and BoJ are likely to maintain an orderly recalibration... Our central case is for policy normalisation to be protracted, gradual, and at varying speeds, amid an incomprehensive global economic recovery. In the absence of exciting catalysts from monetary policy, trade and government spending will remain important factors for market analysis in Geopolitical and political risk events will also be an important part of alpha calculus.. Against this backdrop and post-valuation normalisation in 2017F, we expect S- REITs to perform in line with the broader market in

13 Figure 14: Projected 2- to 10-year interest rates % Figure 15: Projected US$/S$ exchange rates Q17f 1Q18f 2Q18f 3Q18f 4Q18f 2y 10y Q17f 1Q18f 2Q18f 3Q18f 4Q18f USDSGD SOURCE: CIMB RESEARCH SOURCE: CIMB RESEARCH S-REIT sector DPU to return to growth track in 2018 Historically, S-REITs share price performance moved in close tandem with earnings growth outlook. Based on our current DPU projections, which do not factor in any new acquisitions, the hospitality sector offers the best DPU growth prospects for 2018, followed by the industrial and office sectors. Figure 16: Projected S-REIT DPU growth by sector FY19f 0.1% 1.2% 0.1% 4.0% 2.8% 3.9% FY18f 0.0% 0.4% 1.6% 2.9% 0.8% 6.9% FY17-9.3% -2.8% 0.3% 2.2% 2.0% 2.1% -9.5% FY16-5.2% 0.7% 2.4% 4.1% 11.1% -10% -5% 0% 5% 10% 15% Overseas retail Healthcare Retail Industrial Hospitality Office SOURCE: CIMB RESEARCH, COMPANY Office remains our sub-sector top pick, hospitality moves up to second place In terms of sub-sector ranking, we continue to prefer office exposure due to the supportive supply/demand dynamics for rental expansion. We have the moved hospitality sub-sector up to second place on the back of clearer RevPAR growth momentum. The industrial and retail sub-sectors fall in line after that. Office As Singapore gradually moves past the wall of new supply that entered the market in the past 2-3 years, we expect rental recovery to be uneven in 2018F. Office rents started to improve in 3Q17. We expect the upturn to continue, closing the negative reversion gap in 2018F, as we project office rentals to rise by 5-10% during the year. The improvement is likely to be led by the core central business district (CBD) area as new supply dries up (until 2021F) and new builds are now largely pre-committed. City fringe and non-prime office rents may lag overall sector recovery in the near term, with the ongoing flight to quality. That said, we think non-cbd spot rents would remain stable from now on. However, with office REIT yields compressing to % for FY18, we believe much of the expected rental recovery could be priced in. Among the laggards, 13

14 we prefer Keppel REIT (KREIT, Hold, TP: S$1.25) and among the landlords, we favour UOL Group Ltd (UOL, Add, TP: S$9.62) is our preferred exposure into this sector. Hospitality Visitor arrivals continued to be healthy, increasing by 4% yoy in 8M17, led by the Chinese as Singapore s top-sourced market. We expect tourist arrivals growth momentum to sustain in 2018F and project an increase of 3%. Meanwhile, the supply of new hotel rooms in 2017F is likely to be fully operational in 2018, while the new supply is expected to taper off in 2018 to 1.7% total room stock growth vs. a 5-year CAGR of 5.1% ( F). Hence, we raise our 2018 REVPAR growth projection to 5% vs 3% previously. Far East Hospitality Trust (FEHT, Hold, TP: S$0.69) is our preferred pick in the sub-sector with its laggard valuation vs. peers, with potential upside risk to earnings should the earningsaccretive acquisition of Oasia Hotel Downtown occur. We have not factored this into our current earnings estimates. Industrial DPU growth for industrial S-REITs continues to be driven by inorganic growth as they continue to acquire assets both in Singapore and overseas. In Singapore, while the manufacturing PMI has gained in strength YTD, on-the-ground sentiment remains mixed, based on our checks. We project new supply of factory space to moderate in 2018F. While new warehouse completions peaked in 2017F, we believe that 2018F will be a year of digestion. Hence, we project multiple-user factory space rents to stabilise in 2018F, while warehouse rents are likely to continue to ease by 3% over the same period. Given the patchy organic rental growth performance of industrial S-REITs, we prefer those with inorganic growth prospects. Among the big-caps, we prefer Ascendas REIT (AREIT, Hold, TP: S$2.72) as it has been a relative laggard vs. peers. Additionally, we continue to favour Frasers Logistics Trust (FLT, Add, TP: S$1.20) due to the favourable Australian industrials sub-sector dynamics and its ability to tap into its sponsor s Australian development pipeline. Retail We project retail S-REITs to deliver average DPU growth of 1.6% in FY18. We expect this to largely come from the resumption of earnings growth following the completion of asset enhancement initiatives, particularly at FCT s Northpoint North Wing, as well as organic rental improvement at FCT s other properties, MCT s VivoCity and SPH REIT s portfolio of properties. While overall retail rents could continue to slip in 2018F, we believe retail S-REITs would achieve slight improvement in rents due to their more active mall management efforts to drive tenant sales and shopper traffic. Low cost of capital heightens inorganic growth driver Cost of capital has declined as the recent run-up in S-REIT share prices has pushed P/V multiples above 1x P/BV, thus making equity an effective form of currency. In addition, debt funding cost has remained low. With a positive yield gap between cap rates and overall funding costs, we expect S-REITs inorganic growth prospects to remain bright. In Jun-Dec 2017, the acquisitions of S-REITs and their sponsors amounted to cs$6.4bn. Earnings contribution from these purchases should largely underpin our FY18 S-REITs DPU growth projection of 2.2%. 14

15 Figure 17: S-REITs acquisitions (Jun-Dec 2017) Figure 18: S-REITs equity fund-raising exercises (Jun-Dec 2017) SREIT Property Acquisition cost KREIT 50% of 311 Spenser St A$347.8m SUN 50% of 477 Collins St A$414.2m AREIT 100 Wickham St, Queensland A$83.8m EREIT 8 Tuas Sth Land S$95m FLT Portflio of 7 Australian properties A$169.3m MINT 40%/60% acquisition by MINT/Mapletree Invts of US data centre portfolio US$750m MLT Mapletree Logistics Hub Tsing Yi HK$4800m CCT Asia Square Tower 2 S$2115.7m CRCT 51%/49% acquisition by CRCT/Capitaland of Rock Square Gungzhou RMB3340.7m MUST 500 Plaza Drive, New Jersey US$115m LMRT Lippo Plaza Jogja S$61.1m Kediri Town Square S$37m Lippo Plaza Kendari S$33.2m FIRT Siloam Hospitals Yogjakarta S$27m CDREIT 94.5% of Pullman Munich Hotel 100.6m KDC REIT B10 Data Centre, Dublin 66m SOURCE: CIMB RESEARCH, COMPANY SREIT MUST FLT CDREIT CCT CRCT MINT MLT Fund raising exercise US$80.5m private placement of 97m new US$0.83/unit S$78.8m private placement of 78m new S$1.01/unit S$255.4m rights issue through issue of 199.5m new on a 20 rights for every 100 unis basis S$700m rights issue through issue of 513.5m new S$1.363/unit on a 166 right for every 1000 units S$103.8m private placement of 63.4m new S$1.612/unit S$155.7m private placement of 81.9m new S$1.90/unit S$353.5m private placement of 300.9m new S$1.175/unit S$286.5m non-renounceable preferential offering of 250.2m new S$1.145/unit on a 1 new unit for every 10 existing units SOURCE: CIMB RESEARCH, COMPANY We anticipate S-REITS to remain in an acquisitive mode throughout 2018, in particular for S-REITs with strong sponsor development pipelines. While no timeline has been confirmed, we believe REITs such as FCT, FLT, CT, SPHREIT and FEHT could potentially expand their property portfolios by acquiring these properties when they stabilize. Figure 19: Selected S-REITs potential asset acquisitions S-REIT SPHREIT FCT FEHT SUN FLT CT MLT Property Seletar Mall Waterway Point, Northpoint South Wing Oasia Hotel Downtown Remaining effective 25% in Southgate Complex, one office block of Park Mall redevelopment Sponsor's Australian development pipeline Westgate, Star Vista Sponsor's properties in Vietnam and China SOURCE: CIMB RESEARCH, COMPANY 15

16 Residential A blockbuster year 2017 has been a blockbuster year in terms of property transactions with a 45% yoy surge in primary market transactions to 10,340 units for the first 10 months of the year, and a 64% jump in secondary market deals to 13,037 units over the same period, on the back of the emergence of green shoots of recovery in the property market, as well as pent up demand. This was accompanied by an even steeper absorption of unsold developer inventory, as sales momentum outpaced new launches of 6,041 units for 10M17. As a result, private home prices rose 0.5% qoq in 3Q17, its first uptick in 15 quarters. Figure 20: Unsold private housing inventory Q3 2008Q1 2009Q3 2011Q1 2012Q3 2014Q1 2015Q3 2017Q1 Unsold units SOURCE: CIMB RESEARCH, URA Figure 21: Primary and resale private home transactions Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1 2014Q1 2017Q1 Secondary market sales Primary market sales SOURCE: CIMB RESEARCH, URA En-bloc fervour to continue into 2018 Consequently, developers, both local and foreign, resumed landbanking activities with a vengeance, tapping both the government land sale tenders as well as the en-bloc auctions, often at higher land prices. This caused the government to sound warnings of possible runaway price inflation. En-bloc transactions are unique to Singapore. Simply put, according to the 99.co website, an en-bloc sale is a collective sale of two or more units in a development to a single purchaser. The logic of en-bloc sales is such that in a land-scarce country like Singapore, where development of different areas and neighbourhoods may vary over time, the ability to rejuvenate or redevelop these land parcels would encourage optimal use of land resources. As property prices rise and land utilisation density increases over time, we think this will present existing owners with the opportunity to recycle or unlock value of their assets. The government land sale programme, as well as the en-bloc market, are the two largest sources of landbank for developers. YTD, developers have bought S$5.9bn of government land sales (GLS) sites and have been awarded S$7.3bn of en-bloc sites. This compares to S$3.4bn-3.5bn worth of total land transactions annually between 2014 and 2016, and close to the S$8bn mark in

17 Figure 22: Historical en-bloc transactions Value (S$m) No of deals Average Figure 23: List of GLS transacted YTD Date land awarded Location Site area (sm) GFA (sm) Developer 18/1/2017 Perumal Rd 3,848 16,161 Low Keng Huat 15/2/2017 West Coast Vale 16,378 45,860 China Construction (South Pacific) Devt Co Ltd 18/4/2017 Toh Tuck Rd 18,721 26,210 SP Setia Intl 3/5/2017 Tampines Ave 10 (Parcel C) 21,718 60,810 City Dev 23/5/2017 Stirling Rd 21,110 88,660 Logan Property/ Nanshan 24/5/2017 Woodleigh MRT Station 25,441 89,043 SPH/Kajima 14/7/2017 Woodleigh Lane 19,547 58,641 Chip Eng Seng/KSH/Heeton 2/8/2017 Serangoon North Ave 1 17,189 42,973 Kepland/Wing Tai 3/10/2017 Beach Road 22,202 88,313 Guocoland/Guoco Group Tender closed Jiak Kim St 13,482 51,231 Frasers Centrepoint Tender closed Fourth Ave 18,532 33,358 Allgreen Properties Pending West Coast Vale 19,592 54,857 denotes foreign developer SOURCE: CIMB RESEARCH, MEDIA RELEASES SOURCE: CIMB RESEARCH, URA The 23 en-bloc deals are spread over suburban and city fringe locations and have been concentrated more towards the eastern and north-eastern parts of Singapore. As they stand, the en-bloc transactions, when fully completed, would create 3,571 more (or richer) millionaires in Singapore. To understand the knock-on effects of this capital unlocking in the broader economy, key questions would include: what could be the wealth multiplier effect and what is the impact on the supply and demand dynamics in the real estate sector? Figure 24: Location map of en-bloc deals SOURCE: CIMB RESEARCH 17

18 Figure 25: List of en-bloc projects transacted from May 16-Dec 17 En-bloc projects Location Acquisition price (S$m) Existing no of units Avg proceeds /unit (S$m) Shunfu Ville Marymount Harbour View Gardens Pasir Panjang Raintree Gardens Pasir Panjang Grange Rd Orchard One Tree Hill Gardens Orchard Blvd Rio Casa Hougang Eunosville Eunos The Albracca Meyer Rd Serangoon Ville Serangoon North Toho Green Yio Chu Kang Tampines Court HUDC Tampines Seraya Crescent townhouse Upper Thomson Sun Rosier Bartley Jervois Gardens River Valley Nanak Mansion Meyer Rd Amber Park East Coast Normanton Park Buona Vista Changi Garden Changi Florence Regency Hougang Dunearn Court Bukit Timah Casa Contendre Newton Mayfair Gardens Bukit Timah How Sun Park Townhouse How Sun Rd Lodge 77 Upper East Coast Crystal Tower Ewe Boon Rd Royalville Sixth Ave SOURCE: CIMB RESEARCH, MEDIA RELEASES Ground checks where will the en-bloc money go? For the purposes of our property report, one of the key questions is whether the strong jump in demand seen in 2017 could be repeated in 2018, coming from not just replacement demand but also from the wealth creation effects of capital unlocking or would demand remain just a function of household formation and in-migration appetite. To help answer the first two questions, we conducted a quick survey on how enbloc sellers would spend their windfall gains. Each respondent was asked the following questions: i) Would you buy a replacement unit and what type? ii) Would you buy another unit for investment? iii) Would you diversify wealth into other investment products such as stocks and bonds? iv) Would you use windfall gains for other expenditures such as travelling, lifestyle, cash (for retirement fund) etc.? Please give examples of planned uses. This study is not intended to be exhaustive or definitive given that the bulk of the en-bloc transactions are still pending completion, rather the study is aimed at getting an idea on how the en-bloc millionaires are planning to go forward. Admittedly, our sample size is not big but diversified enough to give a feel to our queries and offer interesting observations. We have collected responses from a small sample of 31 respondents from across 9 projects, spanning across both the HUDC as well as private condo developments. These respondents are between 30 and 70 years old, with a bias towards the year age group which make up 71% of our sample pool. Key observations from this study are: i) 87% of the respondents will buy a replacement unit, 13% has more than 1 unit and will not need to find replacement housing. 33% of all respondents will buy a replacement unit of a similar type or in a similar location, 35% will downgrade to 18

19 the public resale housing market while 19% plan to upgrade. The budget for a replacement unit could range at between 40% and 70% of the total proceeds. ii) 6% of the respondents will buy another unit for investment (with a caveat of looking for a better price) or planning to fund children s property down-payment. iii) 29% of the respondents will put some proceeds into investments such as stocks and bonds, 52% are unsure of their plans at this point in time. iv) 100% of the respondents will increase liquid assets in the form of retirement nest egg, in cash or into CPF. As well as looking to boost lifestyle including overseas travelling and discretionary shopping. Other options include funding children s education and reinvesting proceeds into their businesses. Figure 26: Summary of survey results Age group Buy a replacement unit Buy an investment unit Investments into nonreal estate products Others (lifestyle and other uses) x x x *Note: = All Yes, X = All No, Items in red denote mixed responses SOURCE: CIMB RESEARCH Figure 27: Summary of responses to buying a replacement housing unit Figure 28: Summary of responses to buying an investment property unit No 13% Not sure 14% Buying 6% Similar type 33% Downgrade 35% Upgrade 19% Not buying 81% SOURCE: CIMB RESEARCH SOURCE: CIMB RESEARCH Figure 29: Summary of responses on investing in non-real estate products such as stocks and bonds Figure 30: Summary to responses on improving lifestyle and other uses of funds such as retirement fund, keep cash, travel, etc. Yes 29% Not sure 52% Yes 100% No 19% SOURCE: CIMB RESEARCH SOURCE: CIMB RESEARCH 19

20 2018 primary home sales projected at 11,000-12,000 We think private home demand could be sustained at 11,000-12,000 units in 2018 on the back of i) additional demand from displaced en-bloc buyers, ii) pent up and upgrader appetite and organic demand from new household formation, and iii) sustained foreign buying given the relative attraction of Singapore property vis-a-vis other regional markets. En-bloc replacement take-up should shore up demand in 2018 and 2019 Based on the collective sales that have been closed so far, there are 3,571 households that could be displaced when their developments taken out of circulation. This represents 30-35% of 2017 demand. Our survey above suggests a 1-for-1 replacement appetite with a small proportion of investment demand. We expect a portion of this take up to be felt in 2018 and the remainder in 2019, assuming a year transaction completion timeline. Furthermore, there are a number of developments that could be up for collective sale, once the existing owners reach the 80% collective agreement threshold. Upgrader demand and new household formation Singapore resident households have increased to 1.26m at the end of Over the period of , there was an average of 20,571 new households formed annually. This was led largely by the net number of new marriages formed and the remaining from migration and other factors. The number of new marriages have been fairly stable over the past 3 decades and we anticipate that it would remain at these levels in 2018F. Hence, this is likely to form the backbone for housing demand. Furthermore, the government has adopted a clear immigration policy with Singapore facing falling fertility rates and an ageing population and labour force. According to the government s 2013 Population White Paper, assuming the current fertility rate of 1.2 and no immigration, Singapore could be facing 0.7 citizens entering working age for every 1 citizen exiting. This will put tremendous pressure on the resident labour force. Hence, the Singapore government targets to expand its total population base to 6.5m-6.9m by 2030F, from the present 5.6m. The targeted population mass is expected to be made up of a core resident population of 4.2m-4.4m. This translates to an average projected population growth rate of % that will continue to underpin long-term demand for housing. In addition, given the larger number of Housing and Development Board (HDB) stock that would be reaching their 5-year minimum occupation period (MOP), we believe there could be more HDB upgrading activity. This timeline also coincides with the maturity in timing of the government ruling in Aug 13 that does not allow newly-minted PRs to buy public housing within 3 years of obtaining their residency status. This could likely result in higher HDB resale transactions and upgrading activity going forward. Figure 31: Projected population growth rate Figure 32: New household formation 3.0% 2.5% 2.3% 2.8% 2.5% Period Average marriages (less divorces) Average resident HH formed ,641 24, ,301 23, ,157 20, % 1.5% 1.5% % % 1.0% 0.5% 0.0% f f SOURCE: CIMB RESEARCH, SINGSTAT SOURCE: CIMB RESEARCH, SINGSTAT 20

21 Furthermore, based on our calculations, mass market housing and 5-room HDB resale flats remain affordable. Buyers of mass market housing with household income in the 80 th decline and upwards, would allocate 30% of their income towards mortgage installment, while buyers of 5-room HDB flats with average household income would need to apportion 24% of their monthly income towards mortgage payment. Figure 33: Residential affordability ratio Affordability - private mass market prices to 80th decile HH inc Affordability - 5-room HDB resale price to average HH inc SOURCE: CIMB RESEARCH, SIN GSTAT, HDB, URA Foreign purchases should remain stable According to the Urban Redevelopment Authority s (URA) statistics, foreign (non-permanent resident) purchasers of private residential properties on Singapore s primary and resale markets amounted to 1,426 units YTD or 6.2% of total sales. While foreign transaction volume YTD was 34.7% above the 2016 level, it has stayed fairly constant as a percentage of total sales YTD. For comparison, in 2014, foreign purchases comprised 9% market share. The top 3 sources of foreign buyers YTD were China, Malaysia and Indonesia (which accounted for 48% of total foreign purchases). Singapore s residential property offers good value relative to home prices in other developed markets such Hong Kong, New York, London, Melbourne and Sydney. We estimate Singapore s private property and HDB prices at 10.4x and 4.8x of annual income as of 1H17, which are attractive compared to other major cities. As such, we believe Singapore would continue to enjoy robust investment demand from foreign purchasers in future. Figure 34: Foreign buyers as % of sales 12% 10% 8% 6% 4% 2% Figure 35: Chinese, Indonesians, Malaysians are top 3 foreign buyers % YTD YTD as % of new sales as % of resale as % of total China Indonesia Malaysia Note: Jan-Dec 2017 (YTD) SOURCE: CIMB RESEARCH, URA Note: Jan-Dec 2017 (YTD) SOURCE: CIMB RESEARCH, URA 21