Where Are We With Singapore REITs?

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.

iEdge S-REIT Leaders Index SGD - Sep 2023
iEdge S-REIT Leaders Index SGD performance chart over the past five years.

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):

Name YTD 1 year 5 years
CapitaLand Integrated Commercial Trust -6.4% -8.65% -10.38%
CapitaLand Ascendas REIT 2.19% -1.41% 12%
Mapletree Logistics Trust 6.96% -0.59% 35.2%
Mapletree Pan Asia Commercial Trust -10.78% -21.16% -10.24%
Mapletree Industrial Trust 0.44% -11.33% 16.41%
Frasers Logistics & Commercial Trust -0.86% -16.06% 8.49%
Keppel DC REIT 20.67% 10.77% 60%
Suntec Real Estate Investment Trust -12.32% -23.9% -34.24%
Keppel REIT -4.35% -19.27% -26.05%
CapitaLand Ascott Trust -4.37% -9.63% -25.94%

Source: SGX


What Contributed to the Poor Performance?

The misconception we have been told is that REITs are a safe and evergreen investment because the real estate market in Singapore is stable and always going up. Well, now you know 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 changes in interest rates, which can increase their borrowing costs and reduce their profits.

REITs will eventually need to refinance their debt. However, interest rates are currently at a multi-decade high, meaning their refinancing costs will be much higher than they were 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 the interest rates will go. In summary, the market expects that 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.

Market rate expectation Sep 2023

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 at some point this year or next year will have to refinance 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 a relatively 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, should a recession come, there could be an additional impact on the REITs’ bottom line due to the 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. Even though the Singapore market has been remarkably resilient, the same cannot be said for other geographies.

Recently, you may have heard the news regarding bankruptcies and near-default events for major property developers in China. Hong Kong’s property market is also declining, partially affected by the China property market sentiment. S-REITs with significant exposure to the Chinese & Hong Kong markets have been doing rather poorly. Mapletree Pan Asia Commercial Trust, one of the bluechip S-REITs, is one example.

Mapletree Pan Asia Commercial Trust - geography Q2 2023
Mapletree Pan Asia Commercial Trust’s geographical exposure to the Chinese and Hong Kong markets is around 30%. Source: MPACT data & analysis.

The issue is not isolated to just China & Hong Kong. Some REITs with exposure to the office sector in the United States 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 the value of their portfolios.


What Would We Do?

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

After the recent price drop, some REITs are getting more reasonably priced and at quite attractive entry levels. 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 more attention to the debt profile of these REITs to see the potential impact of the incoming refinancing cost within the next two years. The more well-staggered their debt maturity profile, the better equipped the REITs will be to weather the prolonged high-interest rate environment.

CapitaLand Integrated Commercial Trust - debt maturity profile Q2 2023
Example: CapitaLand Integrated Commercial Trust’s (CICT) debt maturity is well spread over the next five years. The total debt due for refinancing is only 15% in 2024 and 13% in 2025. Source: CICT data & analysis.

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

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

Stay up-to-date by following us:

Disclaimer: The information provided here is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice or recommendation of any sort.

Share this post:
David Ang

About David Ang

A long-term investor with a portfolio across the United States and Asian equities, REITs, commodities, and fixed incomes. After over a decade of hands-on investing (and making countless mistakes), I'm excited to use this platform to share what I've learned over the years. And let's continue to learn together. Writing about macro economy, equities, personal finance, web3. Follow me on Twitter: @danggaku