Bank of Singapore is expecting S-REITs to experience robust growth due to lower borrowing costs and improved liquidity, with technological advancements and ESG considerations offering potential long-term benefits.
Since the start of 2020, the FTSE ST All-Share Real Estate Investment Trusts Index (FSTREI) has underperformed both the Straits Times Index (STI) and the MSCI Singapore Index due to inflation, high interest rates, and the COVID-19 pandemic.
However, the sector may be turning a corner, with likely Federal Reserve rate cuts and easing inflation. Bank of Singapore is expecting the Fed to cut rates by 25 bps in both September and December, and that could support a gradual recovery in distribution per unit growth (DPU).
“Based on our projections, we expect S-REITs under our coverage to still register an average decline in DPU by -3% for the current financial year,” said Andy Wong, senior equity research analyst, during a client event.
“This is because we are still seeing a drag from the refinancing of lower-cost debt that was taken years ago. However, DPU for the next financial year is projected to stage a rebound of close to 4%,” he said.
Source: Bank of Singapore
Bank of Singapore believes S-REITs are positioned for outperformance in a soft economic landing scenario where the Fed is cutting rates. When Wong’s team analysed the last rate cut cycle starting in July 2019, they found that S-REITs declined by 7% within 12 months but still outperformed the STI by 16 percentage points, despite the challenges of pandemic lockdowns.
Another study by the team on S-REITs performance during periods when the 10-year Singapore government bond yield declined by over 50 basis points showed that, from 2005 to the present, the sector delivered positive returns and outperformed the STI in six out of nine instances. The three periods of underperformance coincided with recessions.
Second largest REIT sector
Jean Chia, Bank of Singapore
“REITs as a sector are very interest-rate sensitive,” said global CIO Jean Chia. “The Singapore REITs market is a relatively young sector within the country’s equity market, with a fairly diverse investor base, including not only institutional investors but also family offices and retail investors.”
“The Singapore REITs market is actually, outside of Japan, the second largest REIT sector in Asia and contributes to about 30% of active REITs trading in Asia as of the end of last year,” Chia said.
Since the first listing, which was Capitaland Mall Trust in July of 2002, Singapore now has about 39 listed trusts. The combined market cap is about S$90 billion, which is about 13% of Singapore’s overall listed market. This year investors have been net buyers, buying about S$3.4 billion and selling around SG$2.5 billion worth of S-REITs.
“And interestingly, over 90% of our S-REITs actually own properties outside of Singapore, which means that for the local investor, this is another instrument that allows our investors to seek exposure to overseas assets in a viable instrument,” she added.
Most and least preferred S-REITs
Bank of Singapore likes S-REITs that are undervalued, have solid financials for capitalising on future opportunities, and ideally have some exposure to Singapore assets. Its sector preferences are logistics and industrial, hospitality, retail, and office.
The bank’s overall picks are Frasers Logistics & Commercial Trust, CapitaLand Ascott Trust, Mapletree Industrial Trust, CapitaLand Ascendas REIT, and Parkway Life REIT. The least preferred S-REITs include Suntec REIT and Keppel DC REIT.
Source: Bank of Singapore
Technology and ESG
Bank of Singapore is betting on technological innovation and ESG to potentially bring about substantial long-term benefits to the S-REITs. Data centres, for example, are using artificial intelligence and cloud computing, while warehouses are becoming more compatible with automation and robotics to enhance their operations.
Even in retail, although e-commerce penetration rates in Singapore have stayed above pre-pandemic levels, Wong pointed out that “retail S-REITs have worked closely with their tenants on their omnichannel strategies, and thus they eventually drove a strong recovery in their tenant sales.”
“And on the ESG front, real estate is one of the most carbon emissions-intensive sectors. Tenants are increasingly demanding for improved energy efficiency in their leased portfolios, given their own net zero commitments,” he continued.
“In fact, green-certified Grade A office stock in Singapore now makes up more than 90% of overall Grade A office supply. Green offices in Asia Pacific are able to command rental premiums ranging from mid-single digits to as high as 20%.”
Elsewhere, hoteliers are adopting ESG practises for eco-conscious travellers, while in ageing populations like Singapore and Japan, office designs for older demographics could promote inclusivity and focus on the social aspect of ESG.
The Singapore Governance and Transparency Index (SGTI) 2024 suggests that S-REITs need to improve disclosure transparency, although they recorded the strongest performance in shareholder rights, Bank of Singapore noted in a report.
