Where Are We With Singapore REITs?

As we finish Q3 2023 soon, we think it’s time to revisit how Singapore REITs have performed this year. Previously, we have written about the potential accumulation period for Singapore REITs. So, how do S-REITs perform this year? Let’s dive in!

S-REITs Performance Recap

We will use the iEdge S-REIT Leaders Index as our benchmark to see where we are with the S-REITs market. This index comprises some of the largest and most liquid REITs listed in Singapore; therefore, we are comfortable using this index as our overall market performance gauge.

As we can see from the chart, the current price movement is hovering near the COVID lows and slightly lower than the level we saw five years ago. From the top in early 2020, the price has declined by around 27%. Ouch! Even with the annual dividend yield of ~5-6%, you are likely still underwater if you have recently purchased the REITs. In short, the Singapore REITs market has not performed too well this year (and even in the past several years).

Here is the performance of its top constituents (data as of Sep 2023):

Source: SGX

What Contributed to the Poor Performance?

We’ve been told REITs are a safe, evergreen investment because Singapore’s real estate market is stable and always going up. But that is not always the case.

Rising Interest Rates & Higher for Longer

Global inflation increased significantly post-COVID-era, reaching 9% in the United States. As a result, the Fed hiked the benchmark interest rate to a multi-decade high of 5.25-5.50%. REITs are highly leveraged, meaning they borrow money to invest in real estate. This makes them more sensitive to interest rate changes, which can raise borrowing costs and reduce profits.

REITs will eventually need to refinance their debt. However, interest rates are at a multi-decade high, so refinancing costs will be much higher than a few years ago, when rates were near zero.

We have started to see the impact of this higher refinancing cost in the last quarter’s financial results for most REITs. Most Singapore REITs reported declining DPUs due to the higher borrowing cost.

Where Are Interest Rates Heading?

We have previously covered where the market expects interest rates to go. In summary, the market expects we are reaching the tail end of this rate-hike cycle. However, the bad news is that the rates are projected to stay high throughout next year.

The market expects the rate to remain at the current level until mid of next year before reversing down. The end-of-the-year rate is at 4.75-5.00%. It is 50bps lower than the current rate but still much higher than a few years ago. Unfortunately, REITs that need to refinance this year or next will have to do so at a much higher cost.

Global Macroeconomic Backdrop

The global economy, except for China, has been doing relatively well. However, some indicators point to a possible recession in the near future. Many economists still believe a recession will likely come in the United States next year.

No one knows for sure whether or not a recession is coming. However, if a recession occurs, it could further impact REITs’ bottom line through lower occupancy rates or rental income.

Geographical Exposure

Many REITs listed in Singapore are exposed to overseas markets, such as China, Hong Kong, the United States, Australia, the United Kingdom, etc. Although the Singapore market has been remarkably resilient, the same does not hold for other geographies.

Recently, you may have heard news about bankruptcies and near-default events among major property developers in China. Hong Kong’s property market is also declining, partly due to sentiment in China’s property market. S-REITs with significant exposure to the Chinese & Hong Kong markets have performed poorly. Mapletree Pan Asia Commercial Trust, one of the blue-chip S-REITs, is one example.

The issue isn’t isolated to China & Hong Kong. Some REITs with exposure to the U.S. office sector have also been doing poorly. We have previously covered that commercial properties in the United States are on shaky ground after a massive bull run from the near-zero interest rate period. The scenario appears to be unfolding, and as a result, many REITs with exposure to the US commercial market will need to mark down their portfolios.

What Would We Do?

We believe that we are entering an accumulation period for Singapore REITs. With interest rates projected to reverse next year, we’re starting to see light at the end of the tunnel. However, with lingering recession risk and sticky inflation, we prefer a more cautious investment approach.

After the recent price drop, some REITs are becoming more reasonably priced and offer attractive entry points. We will adopt the dollar-cost averaging strategy to acquire some of the strongest REITs. As we expect interest rates to remain elevated throughout 2024-2025, we will pay closer attention to these REITs’ debt profiles to assess the potential impact of refinancing costs over the next two years. The more well-staggered their debt maturity profiles, the better equipped the REITs will be to weather the prolonged high-interest-rate environment.

We will also look at the portion of the REITs’ debt hedged to a fixed rate, the adjusted interest coverage ratio (ICR), and the aggregate leverage ratio to ensure the REIT can maneuver if the unfavorable economic environment persists.

If you are interested in investing in REITs, you may look at our Singapore REITs data as a starting point. We recently added more detailed data and analysis on individual REITs, including Mapletree Logistics Trust, CapitaLand Ascendas REIT, Frasers Centrepoint Trust, Keppel DC REIT, and more.

Alternatively, you may also consider investing in REIT ETFs to diversify among the top REITs listed in Singapore. You may refer to our Singapore REIT ETF guide to get started.