Singapore Reits Outlook Rate rise looms larger; we remain underweight.

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1 Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com Singapore Reits Sector outlook Yew Kiang Wong yew.kiang.wong@clsa.com Lester Lim January 215 Singapore Property Top picks: CCT SP Rec OPF Target price: S$1.9; Upside: +12% MLT SP Rec OPF Target price: S$1.24; Upside: +11% FCT SP Rec OPF Target price: S$2.5; Upside: +13% Top SELLs SUN SP Rec - SELL Target price: S$1.8 Downside: -3% Order preference in 1H15: 1) Office 2) Industrial 3) Retail 4) Hospitality Order preference in 2H15: 1) Hospitality 2) Office 3) Industrial 4) Retail 215 Outlook Rate rise looms larger; we remain underweight. Accommodative interest rates have fuelled S-Reit s 6.7% outperformance in 214. However, rising possibility of rate hikes in 215 will cap S-Reits performance going forward in our view. That said, office fundamentals will be robust in 1H15; underpinning our preference for CCT while 2H15 could see hospitality plays shine given receding supply and potential recovery in tourism confidence post recent aviation mishaps. We retain CCT and FCT as our top picks and add MLT to this list. Post strong run and rich valuations, we downgrade Suntec to SELL. Winds of change q S-Reits outperformed broader market by 6.7% on a TSR basis as interest rates remained accommodative throughout 214. q But this is about to change as 3M Sibor has spiked 4% since the beginning of this year to.67% (.46% in 31 Dec 14). q S-Reits yield spread at 345bps is now tighter than historical average of 378bps (post GFC period) and expectations of rising rates from Jun 15 will cap performance Office still trumps while hospitality remains a wildcard q Underlying fundamentals for office still trumps over retail/industrial and hospitality segments with 1H15 favouring office while 2H15 could be better for hospitality. q Office: Supply tightness to persist in 1H15 supporting office rents before easing in 2H15 as competition from new projects (Marina One) puts the brake on rental growth. Grade A office rental growth to moderate to 7.1% in 215 (14.7% in 214) before correcting by 4.2% in 216 on rising supply. q Retail: Rental growth to be challenging in 215 despite easing supply as labour tightness caps expansion demand while lacklustre tourism weighs on tenant sales. We forecast retail rents to ease by 3% and 5% for prime and suburban malls respectively given the higher suburban supply in 215 before flat-lining in 216. q Industrials: Rentals to be flat with city fringe biz parks, Hi-tech space and warehousing holding firm while factory space and traditional biz parks to slow. q Hospitality: Mild recovery in RevPARs of.4% for 215 as receding supply, a weaker S$ and SG5 celebrations should lift tourism receipts. However, this will be offset by weak tourism confidence post recent aviation mishaps in the region. Front end loaded supply and potential recovery in arrivals could see a better 2H15. Underweight S-Reits q No change to our Underweight call on S-Reits q Top picks, CCT, FCT and MLT (upgraded to OPF). q Post strong run, Suntec valuations have fully priced in the success of its AEI and downgraded to SELL Table with revisions and top picks Price S$ Mkt Cap US$m P/NAV Fwd (x) DPU S Fwd DPU Yield growth % YoY Old TP New TP ART SP , U-PF U-PF AREIT SP 2.4 4, U-PF U-PF Old Rec New Rec MLT SP , U-PF O-PF CREIT SP O-PF O-PF CCT SP , O-PF O-PF SUN SP , U-PF SELL KREIT SP , U-PF U-PF CT SP 2.3 5, U-PF U-PF FCT SP , O-PF O-PF

2 8 January Retain Underweight on S- Reits for S-Reits report card Our forecasts were a mixed bag in 214: we were largely right in our order of preference for the real estate segments: office, followed by industrial, retail and lastly hospitality. In addition, top picks CCT, Suntec Reit and FCT performed solidly, while performance of key SELL KREIT lagged. Our call on the macro front has been premature, however, with the Fed more dovish than expected and political and financial turmoil regionally caused money to flow back into yield themes, propelling the S-Reits to outperform vis-a-vis our underweight call. Mixed report card for 214: 4/8 in-line; 1 mixed; we were wrong on rates and S-Reit outperformance Figure CL forecasts: mixed bag Category CL Forecast 214 Actual Vs CL expectati on S-Reit perf Macroforex Macrointerest rates Office Retail Muted organic growth and the risk of accelerated interest rates rise led us to be underweight S-Reits in 214 S-Reits outperformed as Fed more dovish than expected- FSTREI index returned 15.5% vs the STI's TSR at 8.8% Below Mild depreciation of S$ vs the US$ S$ depreciated 5% vs the US$ In-line Fed will taper in 214 and Fed funds rate will be raised in early 215, raising possibility for SIBOR increases Office rents have bottomed in 213, Prime Grade A rents to grow 8% on ongoing demand and dwindling supply Both prime and suburban rents flat, given high supply and labour tightness Hospitality 2% RevPAR growth from easing supply, despite moderating tourist arrivals Industrial Business park and logistics rents to remain resilient over next 2 years Regulation We were not expecting major changes, although we did not rule out more alignment in the issue of management fees, Bloomberg, CBRE, STB, MAS Fed was more dovish than expected; political and financial turmoil in the region caused money to flow into yield Office rents have bottomed, growing a stronger than expected 12% as of 3Q14 Orchard and suburban rents flat as of 3Q14 Year to Oct, RevPAR is down.4% YoY on weaker occupancies as arrivals from China -3% YoY Core business park rents up 2%, while suburban business park rents are down 4% as of 3Q14 MAS proposed a host of changes, including a lower gearing cap, as well as changes in corporate governance disclosures and management fee calculation Below In-line In-line Below In-line Mixed Looking back: how did we do in 214? We started 214 with an underweight in S-Reits as the twin macro headwinds of low interest rates and strong S$ that have driven S-Reit valuations since 29 flagged. Adding to this, organic growth opportunities looked muted, with cap rates prohibitively curbing acquisition growth for S-Reits. As a house our call on the forex front has been right with the S$ depreciating 5% against the US$. However, our bearishness on rates proved to be premature, as the Fed was more dovish than expected, and political and financial turmoil in the region caused money to flow back into yield, pushing S-Reits to outperform the developers and broader market. From the bottom up, our order of preference for the real estate segments proved to be more prescient. We started the year favouring office landlords,

3 8 January reasoning that office rents have bottomed on a more controlled supply in 214 amid firm demand. We expected rents to recover 7.7% YoY. Office rents have indeed recovered since. Prime Grade A rents are up a stronger than expected 14.7% YoY for 214. Runner-up in our preference was industrial, where we thought that rents would remain resilient despite the substantial supply coming on-stream. This is also in line with data reported as of 3Q14. This is followed by retail where we expected labour crunch and adequate supply to cap rental growth. Retail rents were flat for both prime and suburban malls and this is in line with flat growth reported by CBRE till 3Q14. Lastly, we were negative on hospitality sector given the tightening of corporate budgets against moderating arrivals. Unfortunately, aviation mishaps in the region and a collapse in Chinese arrivals saw 1M14 arrivals well below our forecasts and as a result REVPAR fell.4% YoY against our expectations of 2% YoY growth. Figure 3 Total returns of S-Reits under CLSA coverage Office 214 Recc Share price performance* Dividend yield** Total returns CCT O-PF 17.2% 5.8% 23.1% KREIT SELL*** 1.3% 7.6% 8.9% SUN O-PF*** 27.3% 6.1% 33.4% Average 15.3% 6.5% 21.8% Industrial 214 Recc Share price performance* Dividend yield** Total returns AREIT U-PF 1.% 6.6% 16.6% MLT U-PF 1.9% 7.2% 18.1% CREIT O-PF.% 7.3% 7.3% Average 7.% 7.% 14.% Retail 214 Recc Share price performance* Dividend yield** Total returns CT U-PF 6.% 5.7% 11.7% FCT O-PF 8.8% 6.4% 15.2% Average 7.4% 6.% 13.5% Hospitality 214 Recc Share price performance* Dividend yield** Total returns ART U-PF 4.6% 6.4% 11.% Index 214 Recc Share price performance* Dividend yield** Total returns FSSTI - 5.6% 3.2% 8.8% FSTREI - 8.8% 6.7% 15.5%, Bloomberg, *from 31 st Dec th Dec 214; **Based on share price on 31 st Dec 213, *** KREIT was upgraded from SELL to U-PF in Oct after the announcement of MBFC T3 acquisition, Suntec was downgraded from O-PF to U-PF in Jul after its strong YTD performance Order preference in 1H15: 1) Office 2) Industrial 3) Retail 4) Hospitality 215 outlook: A tale of 2 halves For 215, we expect the conversation on S-Reit valuations to continue to be dominated by the prospect of rising interest rates. We expect 3M SIBOR to rise from.5% to 1.% at the end of 215 and 2.% at the end of 216,

4 8 January Order preference in 2H15: 1) Hospitality 2) Office 3) Industrial 4) Retail potentially triggering off a monetary tightening scare earlier should income growth not pick up in the USA. We retain our underweight call on the sector. Our views on the various segments is further differentiated into 1H and 2H where office is our most preferred segment in 1H15 given tight supply while hospitality is our preferred 2H15 on possible recovery of tourist confidence post aviation mishaps and easing supply (Fig 3). We have upgraded MLT and this adds to our two existing preferred picks, CCT and FCT. Post strong run, we also downgraded Suntec to SELL as we believe share price have priced in the success of AEI. Figure 2 CLSA expectations for 215 Category 215 CL Forecast Where we could be wrong S-Reit performance We are Underweight the sector on potential monetary tightening scare S-Reits might outperform if rates stay low Forex S$ depreciation S$ stays flat and supportive of S-Reit valuations Interest Rates Office Retail Hospitality Industrial 3M SIBOR rises to 1% by end 215, 2% end 216 Tight supply in 215 to bolster rents. Better performance in 1H15 with Grade A rental growth moderating to 7.1% YoY - S$12.psf/mth Continued pressure in retail, prime spot rents to fall 3%, suburban spot rents fall 5% in 15CL, flat in 16CL Better in 2H15. RevPARs to recover late 215 as Chinese and Indo tourists arrivals return to growth Rentals remain stable. Better for city fringe business parks and Hi-tech space as well as warehousing. Factory rents to be under pressure. Regulation MAS to raise gearing cap to 5-55% instead of 45% proposed, management fee restrictions not apply to existing S-Reits, if passed Figure 3 Order of preference- prefer office for 1H15, switch into hospitality in 2H15 Rates rise later/less than expected, yield play returns Landlords slash rentals to fill up Marina One and Guoco Tower, pressuring market rents Retail might surprise on the upside should consumer confidence be stronger than expected; government relaxes labour crunch Fallout from airline accidents worse than expected, tourism arrivals fall off a cliff Rental growth from stronger than expected demand MAS sticks to 45% gearing, highly geared S-Reits might have to pay down more debt Order 1H15 preference order and Comments 2H15 preference order and Comments 1 Office - Firm demand against tight Grade A supply should bolster rents at least for 1H15 Hospitality - REVPAR recovery typically takes 1yr and we expect Chinese arrivals to firm up going into 2H. This together with lower supply in 2H will drive REVPAR recovery to +.4% in our view. Within the sub-segments, we prefer luxury and economy over mid tiered hotels 2 Industrial - Stable rents - preference for city fringe Office - Looming supply in 216 along with new projects business parks, Hi tech space and warehousing. Factory competing for tenants in 2H15 to cap landlord's pricing segment to see more headwinds. power. No change to view unless further delay of 216 supply 3 Retail - Ongoing labour crunch continues to hurt retailer's Industrial - Stable rents - preference for city fringe profitability and ability to expand. We expect major business parks, Hi tech space and warehousing. Factory retailers to consolidate their outlet footprints into key and segment to see more headwinds. speciality focused malls with rents falling of 3-5%. 4 Hospitality - REVPAR recovering but still facing Retail - No change from 1H unless government relaxes uncertainty over the return of Chinese tourist arrivals. immigration policy swiftly to ease ongoing labour crunch. With 215 hotel room supply to be front end loaded and the recent aviation mishaps in the region, demand remains a big question mark in 1H Skirting by the cliff edge Our house view is that the US economy is rapidly closing its output gap, with consumer confidence on the rise and most data points directionally bullish. While inflation conditions are weaker globally, the US being an inward-looking

5 8 January economy, will be looking to tighten its monetary policy. Consequently, our economics team expects the Fed to start raising rates in the 215 June FOMC meeting, increasing it 3x by 25bps per quarter to reach 1% by Dec 215 (from.25% currently). 216 will see a further 75 bps increase to end the year at 1.75%. Trough to peak, we anticipate 2bps of increase in this cycle to 3Q17. See Eye on Asian Economies (Fed herring: The bogus threat) for more details. Fed fund rates to hike in June FOMC Figure 4 Interest rate forecast Interest rate forecast (%) 14E 15CL 16CL Fed Funds rate M SIBOR In line with the increase in Fed Funds rate, 3M SIBOR is expected to increase to 1% in 215, before ending 216 at 2%. Indeed, the 3M SIBOR has spiked up 39% since 31 Dec 214 to reach.64% currently. It is also of note that our economic team s rate forecast is now in line with consensus median, and that the timeline for increases has been brought forward by 2 quarters from their prior expectation of rates rises commencing at the end of 215. Figure 5 Figure 6 S-Reits yield gap over 1yr bonds (%) FSTREI Index MASB1Y Index Current: 345bps Max: 1499 bps Ave: 322 bps Min: -47 bps Avg pre GFC: 159 bps Avg ex GFC: 255bps Avg post GFC: 378bps 3mth Sibor spiked up 39% YTD (%) 3M Sibor Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14, Bloomberg, Bloomberg S-Reit yield spreads at 345bps is now tighter than historical average of 378bps (post GFC period). With rates likely to hike in June 215, we believe performance for S-Reits will be capped in 215. We note that S-Reits have fell 22% and 14% in the last two rounds of taper scare. That said, differentiating underlying fundamentals across different subsectors will drive relative outperformance among S-Reits and our preference is in the office and industrial Reits.

6 8 January S-Reits have underperformed on taper scare Figure 7 S-Reits fell 22% on taper scare in May (rebased) FSSTI FSTREI peak 11-22% -14% 15 1 last 95 9 trough 85 8 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14, Bloomberg The prospect of rising rates will also hurt DPU margins due to higher refinancing costs. As more S-Reit refinancing in the last few years have been contracted on floating rates, this could see repricing of these loans on the uptrend over the next few years. Reits with higher gearing, lower cost of debt and higher % of floating debt will be hit harder by rates rise Figure 8 S-Reit gearing and debt cost as of Sep (%) Gearing Debt cost (RHS) KREIT OUECT ART ASCHT MCT MAGIC FCOT SSREIT SUN PREIT CT CREIT MLT MINT OUEHT AREIT AAREIT FEHT CRCT CCT CDREIT FCT SGREIT CACHE SPHREIT, companies For investors that are more bullish than us on interest rates and the potential monetary tightening scare, our order of preference for 1H15 is office, followed by industrial, retail and lastly hospitality. We will recommend a switch in 2H15 into hospitality, followed by office, industrial and retail as the cyclical segments pick up. Our detailed segment outlook can be found in section 2, detailed outlook for companies under coverage in section 3.

7 8 January Office still trumps; hospitality wild card Going into 215, our pecking order for office followed by industrial, retail and hospitality remains unchanged from that of 214 as fundamentally the dynamics remains broadly unchanged for these segments. We expect office supply tightness to persist driving rental growth albeit on a moderating pace while labour tightness will continue to weigh on retail segment. Industrial is likely to be stable with growing divergence between sub-segments and hospitality remains as a wild card given the slew of aviation mishaps. We see better performance for office in the 1H15 while hospitality sector could bounce back in 2H15 if tourist confidence is revived amid easing supply. We expect Grade A office rents to rise 7.1/- 4.2/2.6% in 15/16/17CL respectively. Office- moderating but still positive Office rentals have undergone a revival amid tight supply in 214, clocking in 14.7% YoY growth surpassing our expectations of 7.7% YoY forecasts. With supply tightness to persist in 215, the strength in office rentals will sustain at least for 1H15 in our view before moderating in 2H15 as competition from new projects (namely Marina One completing in 216) puts the brake on rental growth. Hence, we expect grade A office rents to grow a more modest 7.1% this year before correcting by 4.2% in 216 due to rising supply. Despite substantial Grade A supply coming on-stream by 216, we believe rental growth will moderate but not collapse as pre-leasing for these spaces commences progressively. The high pre-commitments for South Beach (8%) and CapitaGreen (5%) will also ease the pressure of looming supply in 216. Figure 9 Figure 1 Occupancy vs rent 8 Occupancies of Prime Grade A offices (S$psf pm) Private Core Downtown occupancy rate (RHS) (%) (%) 3Q13 3Q14 22 Prime Grade A rents Q2 4Q2 2Q3 4Q3 2Q4 4Q4 2Q5 4Q5 2Q6 4Q6 2Q7 4Q7 2Q8 4Q8 2Q9 4Q9 2Q1 4Q1 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 1 1, URA, CBRE, companies, reported that Asia Square T1 and T2 >9% and >6% occupied respectively, as of Mar MBFC Ph1 MBFC T3 OFC ORQ OUE BF 96 Cumulative net absorption of 5.9m sqft since 21, 1.2m since 213 According to URA statistics, occupancy in the Downtown Core planning area came in at 91.9% in 3Q14 vs a 5 year average of 87.9%, islandwide occupancies are at 9.9% vs average of 88.2%. CBRE, which tracks a narrower basket of offices places core and fringe CBD occupancies at 96.6% and 94.4% respectively, vs a 5 year average of 93.3% and 92.9%. Whichever data series is being followed, the overwhelming view is that of very tight supply of office space amid firm demand, with 215 adding only a marginal 7k sqft, most of which is strata titled. Consequently, Grade A office rents have recovered 14.7% since the market troughed in 3Q13, to S$1.95psf pm in 3Q14, with Core CBD Grade B rents also recovering 13.3% to S$8.5psf pm. Ground checks suggests that

8 8 January offerings of sizable grade A space in prime locations remains limited, and this will, in our view, support rents at least till the end of 1H15. Looking out into 216/17, 4.5m sqft of NLA will be coming on stream (viz MBFC s NLA of 3.1m sqft) in the CBD. While substantial at 14% of current CBD stock, we believe that the developers are in a comfortable position financially, and will not be sacrificing rents substantially for occupancy. Figure 11 Figure 12 Office supply by region Upcoming CBD supply vs current stock* ( sqft) Core CBD Fringe CBD Decentralised 4, 3,5 3, 2,5 2, 215 1% 4Q14 4% 217 3% % 1,5 1, 5 Existing stock 81% , CBRE, CBRE, URA, *existing private sector NLA in Downtown Core as of 3Q14, assuming 8% NLA efficiency Figure 13 Known office pipeline (4Q14-217) Year Project Developer Location City Area NLA ( sf) 4Q14 Capitagreen CapitaLand, CCT and Mitsubishi Raffles Place Core CBD 7 4Q14 PS 1 (strata) Far East Organisation Tanjong Pagar Fringe CBD 71 4Q14 South Beach Tower CDL/ IOI Beach Rd/ City Hall Fringe CBD 527 4Q14 CES Centre Chip Eng Seng Chin Swee Road Decentralised 15 4Q14 Westgate Tower Sun Venture/ LKH Western Suburbs Decentralised 36 4Q14 Paya Lebar Square (strata) Guthrie/ Siong Feng/ Sun Venture Paya Lebar Road Decentralised Total 2, SBF Centre (strata) Far East Organisation FE Shenton Way Core CBD EON Shenton (strata) Roxy Pacific Shenton Way Core CBD CT Hub 2 (strata) Chiu Teng Kallang Bahru Decentralised Galaxis Ascendas West Decentralised Futuris/ Synthesis/ Kinesis JTC One North Decentralised Changi (strata) Roxy Pacific Changi Road Decentralised Total Marina One Temasek/Khazanah Marina Bay Core CBD 1, Shenton Way UIC Shenton Way Core CBD Duo Temasek/Khazanah Beach Rd/ City Hall Fringe CBD Guoco Tower GuocoLand Tanjong Pagar Fringe CBD Tai Seng Site Mapletree Tai Seng Road Decentralised Total 3, Site at Cecil Street Frasers Centrepoint Shenton Way Core CBD Intl Factors Bldg/ Robinson Towers Tuan Sing Robinson Road Core CBD Oxley Tower (strata) Oxley Robinson Road Core CBD Arc 38 (strata) Tong Eng Lavender Street Decentralised Vision Exchange (strata) Sim Lian Jurong Gateway Decentralised Total 1,575 Total supply 8,47, CBRE

9 8 January Key office projects in upcoming supply: 1) Marina One (NLA: 1.9mil sqf) by Temasek/Khazanah JV Temasek/Khazanah s joint venture integrated project, Marina One, which will offer 1.9m sqft of office NLA located in the heart of Marina Bay beside Marina Bay Financial Centre (itself about 3.1m sqft of NLA). The project reportedly offers a typical floor plate ranging from 34k-4k sqft, and with two high density floors with floor plates of 1k sqft each. TOP is expected in 216. As of Nov 214, the developer has also managed to sell 333 out of a total 1,42, or 32% of total residential units at a median price of about S$2,2. Assuming an average unit size of 9 sqft, the developer would have recouped ~S$66m of development cost, or a potential S$2bn assuming remaining units are sold at current prices. 2) Guoco Tower (NLA: 85k sqf) by Guocoland Touted to be the tallest building in Singapore at 29m and located on the fringe of the CBD in Tanjong Pagar. The mixed development is built on a 99-year leasehold site which the developer paid S$1,6psf ppr for back in out of the total 78 stories will offer 85k sqft of NLA in floorplates of up to 3k sqft. The rest of the site consists of a retail podium, hotel, and residential apartments. TOP is expected in 216. Guoco Tower also has a high-end residential component- in line high-end CCR units elsewhere in the country, sales have been slow, with the developer only moving 8%, or 15 out of a total 181 unit at ~S$3,psf in the year since project has been in the market. 3) Cecil Street development (NLA: 645k sqf) by FCL FCL s yet-to-be-named office block on Cecil Street is expected to yield 645k sqft of NLA. FCL paid S$1,112psf ppr for the 99-year leasehold land in 213, and TOP is currently scheduled for 217. Figure 14 Figure 15 Downtown Core office market share (as of 4Q13) SingLand 7% CDL 5% Blackrock 7% KPLD 2% HKLand 5% OUECT 1% Others 46% Prime Grade A office market share MCT 1% OFC 9% OUE Bayfront 4% Marina One* 2% Asia Square 2% MBFC 33% KREIT 8% Suntec 9% CCT 9% ORQ 14%, URA, companies, *existing private sector NLA in Downtown Core as of 3Q14, assuming 8% NLA efficiency, companies, * Expected TOP= 216 Office demand while healthy remains fragmented Singapore has seen net absorption of 5.9m sqft of private office space in Downtown Core since 21, or a run rate of 1.2m sqft a year. This has however slowed to about 7k sqft a year since 213. While this initial wave of occupancies was led largely by legal firms and expansion space from existing tenants post the GFC, demand in recent quarters has been more fragmented, consisting largely of e-commerce, IT firms and business services,

10 8 January commodity firms and oil and gas companies with no particular industry standing out in terms of their need for Grade A office space. Good pre-commitments achieved for South Beach and CapitaGreen That said, CDL has managed to lock in pre-commitments 8% for South Beach Towers, or 4k sqf of space within 6 quarters of marketing, against CCT s 5% pre-commitment, or 35k sqf at CapitaGreen over the same period both of which met management s guidance and street expectations. Figure 16 Figure 17 Lease expiry profiles of selected Grade A Offices South Bridge Tower, CapitaGreen pre commitment rates 214 (by % of gross rent) MBFC Ph1 ORQ OFC OUE BF* Capital Tower 6BR KREIT/SUN KREIT OUECT CCT OGS, companies, as of FY13, leases might have been renewed ahead of scheduled expiry; *OUEBF lease expiry as of Sep 213 (%) CapitaGreen South Beach Tower 9% 8% 7% 6% 5% 4% 3% 2% 1% % 4Q13 1Q14 2Q14 3Q14 Dec-14, Companies CapitaGreen precommitments can rise to 62% Over at CapitaGreen, leasing also picked up in with several signings reported by newswires. As of Dec 214, CapitaGreen is 5.4% pre-leased with further tenants under advance negotiations. Including Schroder and Ace Insurance as reported by news, pre-commitment can rise to 62%. We note that most of these leases saw marginal expansions with signing rentals likely in high single digit levels in our view. Demand in the decentralised region is also shaping up as CPG signed a 1yr lease for 83,sqf at Westgate (6% pre-let). Marginal net expansion for new signings Figure 18 Recent new signings at CapitaGreen Tenant Moving out of: Existing NLA (sqf) New NLA (sqf) Expansion/ (Downsize) (sqf) Lloyd's Asia Asia Square Tower 1 65, 75, 1, Schroder OCBC Centre 33, 44, 11, Ace Insurance Parkview Square Undisclosed 38, Similar size Twitter Serviced office Undisclosed 22, Expansion Source: Various Newswires The key risk to our office view lies predominantly with the strategy adopted by two major office projects namely Marina One and Guoco Tower. Given that both projects are integrated developments with significant components in residential and retail, the risk here is that landlords for these projects sacrifice office rents to achieve pre-commitments first. However, so far the strategy deployed by both developers is to launch the residential component before leasing the commercial space. Marina One saw decent take up for its residential component while Guoco Tower s residential sales have stalled. Hence, we do not believe Marina One will be pressured to lower asking rentals for its office component given the good pre-sales achieved for its residential component. Furthermore, with the project being a G2G undertaking, we think

11 8 January it is more likely that Khazanah/Temasek will hold out for a reasonable rent, instead of slashing their prices for tenancies for Marina One. Whichever strategy might be adopted, Marina One/ Guoco Tower pose direct competition for Reit landlords with assets that have large lease expiries in 216/17. Based on the lease expiry profiles disclosed as of FY13, KREIT s Ocean Financial Centre and One Raffles Quay have a substantial 64%/39% of leases by gross rent expiring in 216/17, while CCT s One George Street and 6 Battery Road have 41% and 33% of leases expiring in those two years. As we move into 216, tenant retention, in our view, will become a key objective for these landlords, potentially limiting rental reversions going into 216/17. Figure 19 Figure 2 Occupancy vs rent and supply ( sqft) Net absorption OUE BF (%) Supply OFC 2,5 YOY Rent (RHS) Asia Sq , MBFC Ph1 MBFC T3 ORQ ORP 9 1,5 Asia OGS Sq2 7 1, 5 5 (5) (1,) Office take-up vs GDP (% YoY) Net absorption (RHS) Nominal GDP ( sqm) (5) (1) (15) YTD14 15CL 16CL (5) (1) (15), Companies Grade A rents to rise 7.1% in 215 The painful ongoing restructuring of the economy to increase productivity will see the economy growing at an anaemic pace of 2.8% and 3.5% for 215 and 216 respectively. As a result, we expect job creations to sustain at similar levels to 214 with office demand of 1.3mil sqf on average over the next three years driving vacancy rate down to 8.8% in 215 before rising to 11.1% in 216 on the back on rising supply. Supply driven rent increase Figure 21 Historical supply and demand, vacancy and rents (' sf) Net Supply (' sf) (%) 7, Net Demand (' sqf) 2 6, Vacancy rate (RHS) 18 5, 16 4, , 1 2, 8 1, 6 4 (1,) 2 (2,) CL 15CL 16CL 17CL, URA, CBRE

12 8 January Figure 22 Office rental forecasts Gross rent (S$psf/mth) New Forecast CL 15CL 16CL 17CL Grade A office YoY Change % (46.) (12.9) (4.2) 2.6 Grade B - CBD YoY Change % (47.7) (4.6) (2.6) 2.6 Occupancy rate YoY Change Bps (325.) (6.2) (47.) (232.2) (2.3) Old Forecast CL 15CL 16CL 17CL Grade A office NA NA YoY Change % (46.) (12.9) NA NA Grade B - CBD NA NA YoY Change % (47.7) (9.6) (4.3) NA NA Occupancy rate NA NA YoY Change Bps (33.) (2.7) NA NA, CBRE Labour tightness, ample supply and collapse of Chinese arrivals capped rent growth Retail rents to ease by 3-5% in 215 Labour tightness to persist crimping retail space demand Retail sales picked up in 2H14 Retail Still challenging The ongoing labour crunch coupled with ample retail supply in 214 saw retail rentals flat-lined across both prime and suburban malls. This is in line with our forecasts of zero growth for both prime and suburban rents since the beginning of 214. While retail supply is easing by 58% YoY to a more manageable 931,439 sqf in 215 and pre-commitment levels for new malls have been healthy thus far (albeit slow), we expect growth for retail rents to be challenging in 215. We forecast retail rents to ease by 3% and 5% for prime and suburban malls respectively given the higher suburban supply in 215 before flat-lining in 216. An earlier than expected recovery in tourist arrivals, in particular the Chinese tourists and the relaxation of current immigration curbs to ease the labour crunch are key risks to our forecasts. With the labour tightness likely to persist well in 215, retailer s profitability margins will continue to be under pressure in our view. This lower profitability together with the labour shortage will significantly curtail retailer s existing and future expansions and hence retail space demand in the near term. Our ground checks also suggest retailers are looking to consolidate their footprint in term of outlets with preference to retain those outlets in more established malls. Thus major retail landlords should enjoy firmer occupancies and marginal rental reversions compared to smaller landlords. Retail sales recovering marginally but still soft Singapore retail sales have picked up in recent months with overall sales growing 8.1% YoY in Oct 214, excluding motor sales, retail sales still grew a modest 1.9% YoY. Much of the drag on retail sales in 1H14 has been due to the plunge in Chinese tourist arrivals which fell 29% YoY negatively impacting discretionary demand. However, retail sales have witnessed a marginal recovery with the annual Great Singapore Sale recording a 12.8% YoY growth in sales of S$1.17bn.

13 8 January Retail sales grew 8.1% YoY in Oct. Excluding motor vehicles, retail sales are up1.9% YoY Figure 23 Singapore Retail sales YoY growth (5) (1) (15) (%) SG retail sales current prices YoY Jan 1 Mar 1 May 1 Source: Singstats Jul 1 Sep 1 Nov 1 Jan 11 Mar 11 SG retail sales current prices Ex-Motor YoY May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Supply outpacing demand driving a rise in vacancy According to URA, private retail stock grew 1.8% for 9M14 to 45.8mil sqf. This against a.8% net decrease in occupied stock saw vacancy rates rising from 5.% to 7.4% as of Sep 214. Given the likelihood of a consolidation among retailers, we are forecasting retail space demand to be 8% of total new supply over the next three years. As a result, overall occupancy rates for the sector are expected trend down to 93% over the next three years (Fig. 23). Vacancy rates to slip further to 93% as retailers consolidate Figure 24 Retail space demand and supply (' sf) Supply Demand Occupancy (%) 2, , 96 1,5 94 1, (5) 82 (1,) E 215E 216E 217E, CBRE, URA Retail space over the horizon looks manageable as 215 supply looks to ease by 58% YoY. We also note that 56% of the total supply in 215 comes from outside central region with Waterway Point being the key retail mall in this segment. The mall is jointly developed by FCL, Far East and Sekisui House with a total NLA of 382,sqf. Key malls completing in the downtown core region includes Suntec Reit s AEI for phase 3 and CDL s integrated South Beach project.

14 8 January % of 215 supply comes from Outside Central region - Waterway Point Figure 25 Retail supply breakdown by region as of 3Q14 (sqf) Orchard Downtown Core Fringe Area Outside Central Region 1,4, 1,2, 1,, 8, 6, 4, 2, Source: CBRE *214 figures denoting 4Q14 supply only Figure 26 Retail supply Total Supply Orchard Downtown Core Fringe Area Outside Central Region 214 1,29,351 17, ,1 139, , , , ,43 519, , ,48 4,93 226, ,37 71, ,113 4,57 Total 3,683,935 17,982 1,265,59 477,815 1,77,79 Source: CBRE *214 figures denoting 4Q14 supply only Tenant sales down for most retail landlords Tenant sales under pressure despite firm occupancies The challenging retail environment is best reflected in the operating performance of Retail landlords. Despite achieving firm occupancies, negative tenant sales growth was a consistent trend observed in recent results. FCT s tenant sales were flat at +.6% YoY while CMT s tenant sales fell 3% YoY. In addition, SGREIT s Wisma Atria saw tenant sales dipping 8.7% YoY (stable in 2Q14) while SPH Reit s Paragon s tenant sales fell 5% YoY. Figure 27 Figure 28 Portfolio occupancy for retail Reits Rental reversions trend CMT and FCT 1% 99% 98% 97% 96% 95% 94% 93% 92% 91% 9% Dec 11 Mar 12 Suntec CMT Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 FCT Starhill - SG Dec 13 Mar 14 Jun 14 Sep 14 (%) 2 FCT CMT Q14 2Q14 3Q14 Source: Company data Source: Company data

15 8 January Retail rents to ease by 3-5% in 215 We forecast retail rents to ease by 3% and 5% for prime and suburban malls respectively given the higher suburban supply in 215 before flat-lining in 216. This would widen the rental gap between prime and suburban malls to S$4.39psf/mth against historical average gap of S$4.89psf/mth. That said, we expect demand to skew towards major retail landlords and hence relatively better pricing power against smaller landlords. Specialty and themed focused malls should also see better demand as retailers consolidate. Figure 29 Retail rentals forecast Rentals (S$psf/mth) CL 15CL 16CL Prime rentals Suburban rentals Growth YoY % Prime rentals (.8) (7.1) (7.3) (3.). Suburban rentals 1. (3.1) (5.)., CBRE Prime rentals should fare better than suburban given lower supply and wild card from a revival of tourist arrivals in 215 Figure 3 Rental gap between prime and suburban rentals (S$psf/mth) Prime Suburban Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Figure 31, CBRE Retail supply - Major projects (3Q14 till 217) Year Proposed Project Developer Location Micro-market Estimated NLA (sf) 214 Big Box TT International Jurong East Outside Central Region 329, 214 Marina Square (extension) Marina Square Holdings Raffles Boulevard Downtown Core 2, 214 The Seletar Mall SPH and United Eng. Sengkang West Ave Outside Central Region 188, 214 Capitol Piazza Perennial North Bridge Rd / Stamford Rd Downtown Core 156, Orchard RE Properties Pte Ltd Orchard Road Orchard 147,5 214 Paya Lebar Square Paya Lebar Development Pte Ltd Paya Lebar Road Fringe Area 95, Total 1,29, AEI Suntec City Suntec Reit Temasek Boulevard Downtown Core 125, 215 South Beach CDL & consortium Beach Road Downtown Core 85, 215 Waterw ay Point Far East, FCL & Sekisui House Punggol Central / Punggol Walk Outside Central Region 382,451 Total 931, Hillion Mall Sim Lian Bukit Panjang Outside Central Region 165, Tanjong Pagar Centre GuocoLand Wallich Street Downtown Core 1, 216 Marina One Temasek/Khazanah Marina Way/ Straits View Downtown Core 14, 216 Dow ntow n Gallery OUE Shenton Way Downtown Core 16, Total 866, Changi Airport Terminal 4 Changi Airport Group (S) Pte Ltd Airport Boulevard Outside Central Region 164,365 Total 595,37 Grand Total 3,683,935 Source: CBRE

16 8 January We expect rents to be stable with fringe biz parks and hi-tech space to hold up better Industrial mixed bag We expect rents for the industrial sector to be broadly stable with rents holding up better for business parks in city fringe, Hi-tech space and warehousing space while business parks located in traditional districts further out along with factory space should face some headwinds to rental growth. As a consequence of the ongoing restructuring of Singapore, industrial space demand has been soft and seen by the slow backfilling of vacated spaces among some landlords while conversions to MTBs weighed on NPI margins. Business parks evolving into 2-tiered segment with fringe rents rising faster Business parks and Hi-Tech space The business parks and Hi-tech space segment continues to evolve into a two tiered market with the city fringe business parks segment enjoying better rents relative to the rest of the island. The key difference between these two segments lies in the quality offered. Proximity of city fringe business parks was also a key consideration for price sensitive tenants looking for alternatives to the traditional office space in CBD thereby driving better demand. Meanwhile, business parks in the traditional districts are facing slower demand amid oncoming supply. CBRE noted that some of these projects are facing vacancy rates above 2% mostly located in rest of the island regions. Hence, business park rents in city fringe outpaced that of rest of island with rents growing 1.9% YoY against a decline of 3.9% for rest of island. Rents are now S$5.5psf/mth and S$3.7psf/mth respectively. On the other hand, Hitech space remains firm at S$3.1psf/mth, up 3.3% YoY. Rents of City fringe business parks and rest of island business parks are diverging Figure 32 Business parks and Hi-tech space rents (S$psf/mth) Business Park (off central) 6. Business Park (rest of the island) 5.5 Hi-Tech Growing divergence Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Source: CBRE Warehouse and factory space Ground floor warehousing rents held firm while upper floors eased by 3.3% YoY as some tenants look to consolidate their footprint due to a slower trade outlook. Factory space rents also eased on the back on higher supply with ground floor rents falling 2.6% YoY and upper floor rents falling 3.2% YoY.

17 8 January Warehouse rents more resilient than factory rents Figure 33 Factory and warehouse rents (S$psf/mth) Factory - Ground floor Warehouse - Ground floor Factory - Upper floor Warehouse - Upper floor.5 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Source: CBRE Occupancy rates trending down Despite stable rents, industrial landlords have been facing sliding occupancy rates given the conversion of single tenanted buildings to multi tenanted buildings as some tenants look to consolidate or downsize their footprint. This has a negative bearing on net property income margins for the industrial Reits as multi tenanted buildings are typically not on triple net leases. We expect the ongoing restructuring of Singapore to weigh on tenant s demand for industrial space resulting in slower take up for new projects. Figure 34 AREIT s headline occupancy weaker at 85.6%. Incorporating pre-committed leases for MTB conversions and AEI, occupancy is firm at 87.2% MLT occupancy firm slipped from 97.6% to 97.2% dragged by Singapore, HK and China but offset by higher occupancy in Korea MINT inched up from 9.7% to 91.5% on better occupancies in Hi-Tech and light industrials. Flatted factories and Biz Parks softer Occupancy trend for industrial Reits 11 (%) AREIT MLT MINT Mar 9 Jun 9 Sep 9 Dec 9 Mar 1 Jun 1 Sep 1 Dec 1 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13, company data Dec 13 Mar 14 Jun 14 Sep 14 Industrial rents to remain flat Overall the rental growth for the indurate sector has been moderating since 21 and we expect rental growth to be flattish going forward. In the medium term, structural headwinds facing the sector includes rising supply, shorter land leases, intensified competition and potential threat from Iskandar region as alternative for tenant base.

18 8 January Rental growth pace decelerating across all segments Fringe biz Parks best performing while factory rents the weakest Figure 35 YoY industrial spot rents Business Park (off central) Factory (Ground floor) Business Park (rest of the island) Warehouse (Ground floor) Biz parks (off central): +1.9% YoY Biz parks (rest of island): -3.9% YoY Hi Tech: +3.3% YoY Factory: -2.6% YoY Warehouse: unchanged (5) (1) 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14, CBRE Hospitality- A 2H15 story Hotel performances have been hit by a double whammy of increasing supply amid a moderation in tourist arrivals, especially in PRC visitors post the MH37 mishap. Recent QZ851 aviation disaster could further weigh on any hopes of recovery in tourist arrivals in the near term. That said, things are looking on a structural basis, easing supply, a weaker S$ and publicity from SG5 celebrations (Singapore s 5 th year of independence) should also help tourism receipts and offset this weakness. We believe hotel performance will be muted in 1H15 and should pick up in 2H15. We forecast YoY RevPARs of.4%, 3.9%, 5.3% for 15/16/17CL respectively, with mid-tier hotels continuing to be squeezed while luxury and economy segments recover. Figure 36 Figure 37 Historical room nights, hotel revenues and RevPARs* Hospitality Reits- YoY RevPARs (% YoY) Total room revenue Available room nights (%YoY) Ascott Reit CDL Trust- SG portfolio FEHT- hotels 4% RevPAR 1 3% 5 2% 1% (5) % (1) -1% -2% -3% (15) (2) 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14, STB, Year to October 1M14 RevPARs down.4% Luxury and economy hotels performed better, companies Luxury and economy performed while mid tiered squeezed Based on statistics released by the Singapore Tourism Board s (STB), hotel RevPARs are down -.4% year to October vs -1.4% and -8.5% in 213 and 212 respectively, as the increase in supply (in terms of available room nights) has outpaced the increase in room revenues. While the system numbers may not sound severe, they mask the difference in performance between the different segments. Based on a simple average of

19 8 January monthly data, year to Oct RevPARs are up in the luxury and economy segments, with the lower occupancies in these two segments offset by firmer average room rates, up some 7-8% YoY. On the other hand, mid-tier hotels saw consecutive years of YoY decrease in both occupancies and ARRs as a substantial amount of incremental supply in both 212 and 213 were added in this segment. Figure 38 Figure 39 RevPAR performance by segment RevPAR, occupancy and ARR by segment* 25% Luxury Upscale Mid-tier Economy 2% 15% 1% 5% % -5% -1% -15% -2% -25% Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 (%) Occupancy ARR (RHS) RevPAR (RHS) Luxury Upscale Mid-tier Economy, STB, STB, *Year to Oct, simple average of monthly data (S$) Key projects in 215: CDL/IOI JV: South Beach project -654 rms Genting Singapore: Jurong hotel - 55 rms 214 has added a more manageable 3% to room count, which will help relieve the pressure on RevPARs in 215 in our view. The incremental supply from will mostly come from the mid-tier and upscale segments, which will weigh on the RevPARs of those segments. Larger projects coming onstream include the hotel at South Beach Tower adding 654 rooms, as well as 55 units from Genting s hotel in Jurong, both slated for 215 and accounting for 1/3 of supply that year. Figure 4 Figure 41 Pipeline of hotel supply 7, 65, 6, 55, No of hotel rooms 55,18 1,67 4yr CAGR = 4% 3,219 2,753 2,11 64,698 Breakdown of supply by market segment 1% 8% 6% 15% 44% Upscale/Luxury Mid-Tier Economy 38% 2% 18% 38% 51% 5, 4% 45, 2% 41% 6% 44% 49% 4, Total 217, Horwath, CDLHT % , Horwath, CDLHT International arrivals from have been largely driven by Indonesian and Chinese visitors, each accounting for 23% of the total increase. As a consequence, the crackdown on corruption in China and MH37 mishap, coupled with potential fallout from the recent AirAsia crash remain potential swing factors determining the timing of RevPAR recovery.

20 8 January Past experience suggests arrivals took a year to recovery post aviation mishaps How long will it take to see arrivals recover post aviation mishaps? Based on the experience of the Silkair MI185 accident back in Dec 1997, Indonesian arrivals took a year to return to the same level prior to the accident, before continuing to grow subsequently. With the MH37 incident happening in Mar 213, and with peak Chinese arrivals typically occurring in Feb, Chinese arrival statistics from 1Q15 will provide a good litmus test to the strength of the recovery. Figure 42 Figure 43 Indonesian arrivals only started recovering after 1Y Accommodation tourism receipts by country (213) (% YoY) YoY arrivals from Indonesia 8% Indonesia Riots in Indonesia 6% approaches Silkair 4% IMF for aid Flight 185 2% crashes % -2% -4% -6% -8% Jan 97 Mar 97 May 97, STB Jul 97 Sep 97 Nov 97 Jan 98 Mar 98 May 98 Jul 98 At least 1 year after crash before arrivals resumed growth Sep 98 Nov 98 Jan 99 Mar 99 May 99 Jul 99 Sep 99 Nov 99 Americas/ Europe 17% South Asia 11%, STB Oceania 7% Other North Asia 16% Others 6% Indonesia 11% Other SEA 2% China 12% Indo and Chinese tourists were fast growing segment but also spend less than peers on accommodation While the fast-growing Indonesian and Chinese visitors have grabbed most of the spotlight in the tourism numbers, it is of note that these two nationalities only contributed ~23% of accommodation receipts in 213 even though they comprised 35% of tourist arrivals implying a lower accommodation spend per tourist from these two major market contributors. Other Asian visitors as well as visitors from the Americas and Europe punched above their weight in terms of accommodation spending, and the depreciation of the S$ will boost the affordability of these visitors and potentially drive up spending. Figure 44 We expect.4% RevPAR growth in 15CL, 3.9% in 16CL and 5.3% in 17CL RevPAR forecast (% YoY) 7% 6% 5% 4% 3% 2% 1% % -1% -2% -3% ARR RevPAR Occupancy (RHS) 89% 88% 87% 86% 85% E 15CL 16CL 17CL Forecasting tourist arrivals to grow 1.2% YoY We forecast international arrivals in Singapore to grow 1.2% in 215, 6.% in 216 and 6.1% to hit 17.5m visitors per annum in 217. To arrive at this figure, we assume Indonesian arrivals will fall 2% in 215, before returning

21 8 January to growth in subsequent years. We also assume that Chinese arrivals will see a tentative 5% YoY growth before returning to rate of growth below trend. Based on our assumptions, ADRs will decrease 1.9% in 15CL, before growing 5.7% and 5.9% in 16 and 17CL respectively. RevPARs will see a tentative.4% growth in the whole of 215, before growing 3.9% and 5.3% in 16CL and 17 CL respectively. Should the fallout from the airline accidents be more widespread than we think and depress arrivals from other South East Asian countries as well, this will pose downside risk to our numbers, possibly pushing sustained RevPAR growth back into 16 and 17CL. Top picks- CCT, MLT, FCT, SELL Suntec Besides retaining CCT and FCT as our top picks among the S-Reits, we have also upgraded MLT to O-PF given acquisition opportunities and the resilience of its logistic portfolio. In addition, we have downgraded Suntec to SELL post strong run leaving less upside to our target price. Ascendas REIT (Underperform S$2.33 TP) We refresh our models for AREIT s latest acquisitions; in particular, we are assuming that latest acquisition APERIA achieves 65%/85% occupancy in FY15 and FY16 respectively from 5% in 1H15, which raises DPU marginally. While we believe that industrial rentals will remain firm in our forecast years, much of AREIT s business park supply is in the more challenged International Business Park region, rather than the better performing fringe of city areas. Further, leasing progress on Jinqiao business park property, as well as developments and AEIs remain sluggish. With a lack of substantial catalyst and with risks to the downside from rates, we retain U-PF with a revised target price of S$2.33. Figure 45 Earnings change summary AREIT SP Current Previous % Change S$m 15CL 16CL 17CL 15CL 16CL 17CL 15CL 16CL 17CL Revenue % 6.1% 7.8% Net Property Income % 4.8% 6.8% NPI margins (%) 7% 7% 7% 71% 71% 71% DPU S % 1.% 3.6% Ascott Residence Trust (Underperform S$1.22 TP) Factoring into our numbers ART s latest acquisitions in Australia and Japan, we upgrade our revenue forecast by 12-14%. However, the use of more expensive perpetuals means that DPU improvement is a more muted 4-7%. With an increasing exposure to developing markets such as China, we also tweak ART s risk free rate upwards marginally, retaining our U-PF on a revised target price of S$1.22. We acknowledge that the execution on recent acquisitions has seen a marked improvement, and ART s exposure to interest rates might not be as substantial as pure-play Singapore reits. 2H15 might also look more interesting for the stock as tourism recovers cyclically, and the parent s collaboration with Quest potentially start bearing fruit and providing ART with a larger acquisition pipeline; we will need to see more evidence in a strong recovery in hotel RevPARs outside of Europe, as well as acquisitions by the tie-up before we are able to change our view on the stock more meaningfully.