What's next for Singapore REITs?

Insights

REITs

By Gerald Wong, CFA • 27 Apr 2024 • 0 min read

We recently held a webinar to share our thoughts on Singapore REITs. Here's what you need to know about their outlook.

In this article

0 min read

What happened?

Many investors have been asking questions about REITs in the Beansprout Telegram community recently. 

This comes as Singapore REITs have largely fallen this year as interest rates are expected to stay higher for longer.

For example, we saw some REITs such as Keppel DC REIT reaching their 1-year lows. REITs that were fairly resilient in 2023 such as CapitaLand Ascendas REIT have also corrected.

To answer some of these questions, I decided to host a webinar this week to discuss what has been driving the share price weakness.

I also shared what I will be looking out for to determine where the share prices of the REITs are headed next.

If you had missed the webinar, you can find a recording of the session here.

To get an email alert when we next host a live webinar, sign up for our free newsletter below.

If you are interested to learn about income opportunities in the Singapore market, join our upcoming webinar on 14 May 2024 to find out how you can identify these opportunities. 

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Transcript of Webinar on "What's next for Singapore REITs?"

9:44 How do interest rates affect Singapore REITs?

Higher interest rates can impact REITs in three ways:

  1. Higher financing costs
  2. Lower property valuations
  3. Lower attractiveness to investors

Higher interest rates can lead to higher financing costs for REITs, potentially impacting distributions. Additionally, higher interest rates can lead to lower property valuations and make REITs less attractive to investors.

15:15 Investing Checklist for REITs

Beansprout's investing checklist for Singapore REITs consists of three key factors:

  1. Fundamental Strength: Quality of sponsor and management team, tenant mix, and occupancy rate.
  2. Financial Strength: Debt levels, interest expense, and valuation.
  3. Valuation: Price-to-net-asset value and dividend yield.

reit investing checklist

18:41 Fundamental Strength of REITs

REITs should be able to earn good rental income, with higher rents generating higher net property income and potentially higher dividends. Despite unfavorable interest rate conditions, REITs have shown healthy rental growth across office, retail, and industrial assets, with retail being the most resilient subsector.

  1. Retail 
  2. Hospitality
  3. Office
  4. Industrial

23:08 Retail

  • Retail sales have been healthy, with 8.4% year-on-year growth in February
  • Discretionary spending has seen a lift due to tourism recovery
  • CICT (Capitaland Integrated Commercial Trust) has seen resilient tenant sales and shopper traffic
  • Rents have recovered consistently post-COVID, with suburban malls recovering first

28:18 Hospitality (hotels)

  • Tourist arrivals have reached a post-COVID high in March
  • Average revenue per available room (REVPar) has recovered to above pre-COVID levels
  • Muted growth in new hotel supply is expected, which could lead to continued expansion in REVPar

31:35 Office

  • Office rents have seen a gradual recovery since 2021
  • Recovery has moderated in 2023 and 2024 due to economic uncertainty and high interest rates
  • Office supply is expected to grow faster than historical average over the next few years, potentially impacting rental growth

34:52 Industrial

  • Industrial rents recovered strongly in 2022 and 2023 due to demand from e-commerce and logistics
  • Growth has started to moderate due to economic weakness in selected sectors, such as manufacturing and exports
  • Overall, still healthy, but not in a strong growth phase.

36:25 Balance Sheet of REITs

  • Gearing level (borrowing) is a key factor to consider, especially with higher interest rates
  • Average gearing level for Singapore REITs is 38%, within the MAS limit of 50%
  • US-office REITs and EU-focused REITs have relatively high gearing levels compared to other REITs
  • Office REITs have slightly higher gearing levels, which could impact distributions if interest rates rise
  • Retail REITs have lower gearing levels, making them more resilient to interest rate increases

Interest Rate Trends

  • Average interest rates for REITs increased sharply in 2022 and early 2023 but have since moderated
  • If interest rates remain stable, further increases in interest expense may not be significant
  • Fixing debt at a certain interest rate can provide protection against rising borrowing costs

43:28 Valuation of REITs

  • REITs are currently trading at a discount to their book value, with a price-to-book ratio of 0.9 times
  • This is below the historical average and indicates that investors are cautious about the REIT sector
  • Individual REITs such as CapitaLand Integrated Commercial Trust and Mapletree Logistics Trust are trading at a discount to their five-year average

47:50 Interest rates likely to remain higher for longer

  • The CME FedWatch tool shows that investors expect interest rates to remain unchanged in the near term
  • The first rate cut is expected to occur in September, with another potential rate cut in December
  • This is subject to change and investors should keep a close eye on interest rate expectations

51:35 Comparing yield of REITs vs. other assets

  • The average dividend yield of large-cap REITs is currently 6.2%, higher than other asset classes such as T-bills and fixed deposits
  • Investors should compare the dividend yield of REITs to other asset classes such as T-bills, cash management accounts, fixed deposits, and Singapore Savings Bonds, to determine if the additional risk is worthwhile
  • The Beansprout website offers a live tool for tracking dividend yields, T-bill yields, and other asset classes
  • The stock tool on Beansprout allows users to access latest data and statistics on REITs, including occupancy rates, rental reversions, and debt levels.

1:04:17 REIT ETFs

  • Consider REIT ETFs for immediate diversification and exposure to a basket of different REITs.

1:06:54 Summary

  • Interest rates will continue to affect the price of REITs
  • REITS may be affected by higher interest rates to a different extent
  • Look for REITs with strong operating performances, healthy balance sheet, and attractive valuation
  • Consider REIT ETFs to get broad based exposure to REITs

Resources mentioned in the video

To get an email alert when we next host a live webinar, sign up for our free newsletter below.

If you are interested to learn about income opportunities in the Singapore market, join our upcoming webinar on 14 May 2024 to find out how you can identify these opportunities. 

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