Singapore’s REIT Industry Is Growing Fast With No Signs of Slowing Down

For several years now, Real Estate Investment Trusts (REITs) have been a thriving investment option, for several investors in Singapore. It does not seem to slow down anytime soon. REITs are popular in Singapore because they offer exposure to diverse sectors in the real estate industry, regular dividends to investors, and tax shield. The industry will continue growing and hit new highs as the central bank considers keeping interest rates low as a way of encouraging more investments.

State of REITs in Singapore

Since the begging of the year, Singapore’s listed REITs have gained 20% which raised concerns that they were becoming too expensive to afford. However, the recent measures of the central bank considering looser debt regulations has prompted many analysts to hold buy ratings for REITs. They are optimistic because of the high yields that REITs bring and the possibility of REITs acquiring new assets, which will thus boost valuations.

On Thursday, Singapore’s Monetary Authority finalized consultations that looked to review the borrowing limit for REITs from the current 45% to around 50% to 55% of their deposited assets. The increase if the limit aims at helping REITs in Singapore compete with private equity funds and foreign counterparts in bidding for new assets. The move could potentially increase asset acquisition as well as increase distribution levels since the borrowing costs are much lower relative to rents that tenants pay.

The central bank is also contemplating the introduction of a minimum interest coverage ratio of 2.5 times as a way minimizing risks associated with servicing of debt by firms. Analysts have indicated that the changes to the leverage limit will enhance access to funding for REITs because debt is a faster and affordable source of capital relative to equity. The country’s leverage limits for property trusts are considered among the strictest in the globe. In other countries, there are higher or no leveraging limits; like in Malaysia and Thailand, it is 50% and 60% respectively. While in Australia, Japan, and the US do not have gearing limits.

In the coming months, interest rates are expected to drop as the central bank loosens the monetary policy as a way of spurring economic growth. The higher leveraging limits will be beneficial for REITs and will increase distribution per unit by between 2% and 5%. The new gearing limit will help the REITs actively manage their portfolio and make distribution accretive acquisitions, enhancing growth for unitholders in the long term.

Performance of REITs

Since the start of this year, Singapore REITs have been acquiring assets aggressively. In 2018 Ascendas REIT acquired up to 38 properties in Australia and across the UK in three months demonstrating a broader trend among Singapore’s REITs of making large scale investments. In January CapitaLand Ltd reached a $4.4 billion agreement to acquire Singbridge Pte and Ascendas which made it the largest diversified real estate manager across Asia.

REITs usually pay investors from the rents they accrue, and they are very important in the Singapore Exchange. REITs have a combined market value of more than S$100 billion accounting for around one-tenth of market capitalization. REITs are up almost 20% since the beginning of the year performing better than the 8.9% benchmark increase set by Straits Times Index for the period. Over the period REITs have been the most popular segment among institutional investors having drawn net inflows of close to S$396.3 million in the first half of the year.

Currently, CapitaLand-managed REITs CapitaLand Mall Trust, Ascendas REIT and CapitaLand Commercial Trust are trading at more than 1.2x the value of their assets after excluding debt. This ratio is much higher because REITs usually trade around their book value. According to a REIT tracker by OCBC Investment Research other REITs; such as Frasers Centrepoint Trust and Mapletree Commercial Trust, have been trading at a fairly large premium to book value.

What is driving the growth of REITs in Singapore?

The REITs in Singapore have been on a rally, but it looks like that has been overstretched as profit-taking kicks in. According to CMC Markets Singapore strategist Margaret Yang, the rich valuation and unconvincing yields have rendered REITs susceptible to a short term sell-off.

For instance, retail REITs have performed well after shrugging off the headlines regarding contracting retails sales and have since reported strong occupancy and positive rent return on renewed leases. Currently, the supply of shopping center floor space is much lower compared to developed markets like Hong Kong, Australia, and the US. This indicates that there are more growth opportunities in the retail space. The rally has also been enhanced by the shift to omnichannel retailing which has increases relevance of shopping malls, thus opening more opportunities.

Leading REITs such as CapitaLand Mall Trust reported higher distribution per unit in the quarter just ended, and this was mainly a result of acquisitions. The REIT acquired Westgate in November 2018, and it benefited from the acquisition by 70%, and unitholders can also expect to benefit from the rental income from Funan that the REIT opened in June. The low gearing is a blessing to the REIT, whose debt-to-asset ratio stands at 34.2%, and this will present the opportunity to make debt-funded purchases.

Office REITs, especially those with Grade-A office exposure, have also benefited from the market recovery with positive rent returns. This comes following a two-year recovery period in office rent, but that may have taken a breather as rent growth has slowed in Q2 2019. Weakening manufacturing and exports are hurting Industrial REITs as supply has surged by 15 million sq. ft. this year.

REIT outlook in Singapore

REITs have performed well in Singapore in recent years with growing distribution per unit, and the latest development of lowering rates will boost even further growth in the industry. Some analysts are holding a positive outlook regarding the market going into the future amid concerns that REITs might be overvalued in Singapore. Singapore is among the countries with the highest REIT yields in the globe, and the trend is expected to continue, thus remaining an attractive investment option for Singaporeans.