Realty check: SREITs’ income margins to deteriorate amid intensifying labor crunch

Rental reversion will also moderate.

Singapore’s real estate investment trusts reported stable results in the third quarter, but softer operating trends are looming in the horizon for local REITs.

According to OSK DMG, the outlook remains positive for SREITs but shareholders should expect a modest deterioration of net property income margins amid the country’s intensifying labor crunch.

“The effects of the labour crunch from a tighter foreign labour quota policy continue to be felt by high-touch and foreign worker-dependent segments – particularly hospitality, retail and industrial. We have witnessed a QoQ drop in NPI margins for Ascendas REIT, CapitaCommerical Trust, Cache Logistics Trust, Keppel REIT, CapitalMall Trust, Mapletree Logistics Trust and OUE Hospitality Trust in their recent 3Q14 results. We expect the trend to persist with progressive MoM increases in levies for both S-Pass and work permit holders for all sectors in 2014-2015,” noted OSK DMG.

SREITs will also see a moderation in rental reversions, as the continuous addition in supply over the next few years would limit landlords’ bargaining power in attempting to raise rental rates.

“On a relative basis, the outlook for offices remains the brightest given the 2-year supply shortage in the central business district (CBD). Retail sales continue to soften on the back of underwhelming demand, rising mall and e-commerce competition as well as slowing tourist arrivals. Hotel room rates are still under pressure as supply is expected to be abundant over the next three years. There are also pockets of weakness in the industrial segment, as rental rates and property prices are already indicating that they are on the cusp of a decline. The office sub-sector remains our preferred segment, followed by retail and hospitality,” noted OSK DMG.

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