Why Are Singapore REITs Underperforming and What Can Investors Do?

Yen Joon

Yen Joon

Last updated 10 November, 2022

Rising interest rates and inflation have seen it affect the Singapore REIT market. If you're wondering what you should do, read on.

The Singapore real estate investment trusts (S-REITs) have always been a reliable source of dividend income over the years. However, Singapore REITs have been underperforming due to a combination of high inflation and surging interest rates.

According to the iEdge S-REIT Leaders Index, which measures the most traded S-REITs on the Singapore Stock Exchange (SGX), fell from 1,317.63 to 1,110.95 year-to-date, or 18%. The index even fell to 1,063.17 in mid-October 2022.

In this article, we'll take a look at the reasons why REITs have been falling and what you can do as investors. 

 

Why are S-REITS underperforming?

There are a few reasons why S-REITS have been in the red of late. Below are some of the reasons:

1. Rising interest rates and inflation
2. Investors flocking over to safer investments
3. Weak performance of major currencies against the SGD

Rising interest rates and inflation

As previously mentioned, the rising interest rate environment is one of the reasons why REITs have fallen. 

This year alone, the U.S Fed has hiked interest rates six times, including four successive 0.75 percentage point hikes. And they’ve also signalled that the rate hikes won’t stop anytime soon.

The reason for the aggressive interest rate hikes is to drive inflation down. By raising interest rates, the cost of borrowing becomes more expensive, which theoretically helps to slow down inflation. 

Since borrowing costs have gone up, it has become more expensive for REITs to grow via accretive acquisitions. Additionally, the rise in interest rates also increases a REIT’s debt, thus affecting its profit and the amount of distributable income. 

On top of this, with inflation surging upward, operating expenses such as utilities, employee wages, marketing costs, and property maintenance fees have all gone up in tandem. 

This has caused concern among some investors, who worry that REITs might have to lower their DPU. 

Investors flocking over to safer alternatives

Now that interest rates are on the rise, the yields of bonds, savings accounts, and fixed deposits have similarly gone up. 

In fact, the latest Singapore Savings Bond (SSB) tranche has a 10-year yield of 3.47%, which is at an all-time high. Meanwhile, the 6-month yield of the Singapore Treasury Bills (T-bills) stands at 4.19%; and the yield for Singapore Government Securities (SGS) bonds is 3.36%.

Rates for savings accounts and fixed deposits have hit as high as 7.65% and 3.85% respectively.

As such, some investors who own REITs might be tempted to pull out because now they can achieve almost similar but less risky yields elsewhere. 

 

Weak performance of major currencies against the Singapore dollar

Over the past few months, major currencies such as the Japanese Yen, Euro, and Pound Sterling have weakened against the Singapore Dollar. 

Since Singapore REITs collect their rental yields in their respective domestic currencies, they would need to convert the base currencies into SGD when paying out their distributions.

For example, Daiwa House Logistics Trust which has invests in Japan REITs will have seen their income distribution affected due to the weakening Yen.   

 

Are higher interest rates bad for REITs?

Although rising interest rates make borrowing costs more expensive for REITs, they aren’t necessarily bad.

When the economy is experiencing growth, REIT prices tend to go up as well. This is because a growing economy will increase the value of a REIT’s underlying assets. Demand for real estate will also increase, which translates into higher occupancy rates.

In one study, the S&P reviewed six periods from the 1970s during which the yield of the 10-year Treasury grew substantially.

It was found that REITs actually recorded positive returns in four of them and even managed to beat the stock market in three of those periods. Take a look at the table below:

Source: S&P Dow Jones Indices LLC, Bloomberg, The Federal Reserve

This suggests that interest rates alone don’t affect a REIT’s performance, which means that there are other factors that affect a REIT’s share price. These include a REIT’s underlying assets, long-term prospects, net asset value (NAV), occupancy rate, and DPU history.

That said, we’re also seeing a phase where interest rates have been increasing so quickly in a short period of time. 

What can investors do?

Even as REIT prices have fallen, there are still benefits to investing in Singapore REITs.

Since REITs are required to distribute at least 90% of their taxable income as dividends. This makes REITs appealing to investors who want passive income.

According to REITAS, S-REITs have generated long-term dividend returns that are more favourable than REITs in other markets. The average dividend yield of S-REITs was 6.6% as of June 2022. 

Another benefit of investing in REITs is as investors, you don't have to pay any dividend tax on your REIT dividends. On top of that, you can invest in a diverse range of properties without actually buying the properties. 

If your portfolio consists of good quality REITs, you should continue to hold them or average down so that you can continue receiving dividend payments. Now that REIT prices have fallen, this could also be a good opportunity to buy a REIT at an undervalued price. 

Remember also not to go for a REIT with the highest yield because it usually means that the REIT has some underlying asset or financial problems, and thus is paying a higher yield to entice investors. Since REITs have to distribute at least 90% of their income as dividends, paying a high dividend isn’t sustainable. 

Aside from that, look at a REIT’s underlying assets. For instance, specific sectors such as office REITs are recovering as more workers have gone back to the office. Other areas to look into include a REIT’s gearing ratio, whether it has high fixed loans, and consistent DPU payouts. 

One such REIT to look out for is CapitaLand Integrated Commercial Trust (CICT), which recorded a net property income (NPI) growth of 12.7% year-on-year to S$273.3 million in Q3 2022.

The company's total assets under management (AUM) stood at S$24.2 billion as of 31 December 2021.

Furthermore, CICT also reported positive results for its fiscal Q3 2022 business update; its gross revenue increased by 13.7% year-on-year to S$3714.1 million and recorded a net property income (NPI) growth of 12.7% year-on-year.  

The overall occupancy rate also remains healthy, rising to 95.1% from 93.8% in the previous quarter. 

Meanwhile, the rental reversion for its office properties in Singapore also went up 7.9% from the beginning of this year, with an occupancy rate of 96%.

Keep in mind that the above is just an example and isn't a 'must-have' REIT to buy. Remember that when it comes to investing, always understand your risk profile and do your own research to understand the investment returns.


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In my past life, I was always broke because of a lack of financial literacy. Now, I publish a few posts every week* on personal finance to help you manage your money better. *I mean, I’ll try