Performance of most sub-sectors in line with our expectations

　　Asset enhancements, acquisitions and capital recycling in focus

　　Preferred ideas – CCT, KREIT, FEHT and FCT, all rated Buy

　　Performance of most sub-sectors in Singapore in line with our expectations: Whilethe demand-supply outlook for all property sub-sectors remains unfavourable for 2016and will only gradually improve from 2017, in our view, this has been well documentedwith expectations largely in place. In terms of deviation relative to expectations, datapoints on the office sector (leasing activity, tenant retention and reversions achieved bylisted office REITs) have increasingly led consensus to take a less negative view of thissub-sector (along the lines we have been advocating). Likewise, the rebound in leisuretravel suggests that consensus may have been overly bearish on the hotel sector and isnow taking a more moderate stance (and in line with our views). On the other hand, forthe serviced apartment sector, we have increasingly shifted towards consensus ascorporate demand continues to disappoint. Lastly, for retail and industrial, the surprisesare the least, though the industrial sub-sector in Singapore appears incrementallychallenging, given increased regulations, the economic slowdown and the risk of outdatedstock resulting in structurally higher vacancies.

　　Assets enhancements, acquisitions and capital recycling in focus: Assetsenhancements, acquisitions and capital recycling remain in focus as the sector triesto generate growth in a challenging environment. Some malls owned by REITs areundergoing or planning to undergo enhancements and redevelopments, with detailedplans yet to be disclosed in some cases (thus, there is room for upside surprises).REITs are also on the lookout for acquisitions – these include assets they are jointlydeveloping (or have jointly developed), assets owned by the sponsor, as well asthird-party acquisitions and acquisitions overseas. Associated with acquisitions,divestment of non-core and/or older assets is also in focus – proceeds from suchdivestments can go towards funding acquisitions (i.e., recycling assets).

　　Sector trading closer to historic averages; we prefer CCT, KREIT, FEHT, FCT – allrated Buy: After a 7% return YTD (price return plus dividends), the sector’s dividendyield is 5.9% (in line with the historical average), the spread over the 10-year Singaporegovernment bond is 390bp (vs. the historical average of 360bp) and the PB is 1.00x (vs.the historical average of 1.09x); as such, the sector as a whole is trading closer tohistoric averages. Our preferred ideas are: CCT, KREIT and FEHT (from theeconomically sensitive sectors) and FCT (for investors who prefer to stick with defensiveproperty sub-sectors relative to office and hospitality); all rated Buy. The direction ofinterest rates is key driver for the overall sector, posing upside and downside risks.