Are Singapore’s REITs Becoming Too Expensive?
Real Estate Investment Trusts (REITs) have been a popular form of investment in Singapore for quite a number of years. However, analysts are now questioning their ability to remain a viable investment option in the future.
What has happened so far in 2019
Analysts from different organizations including CMC Markets Singapore Pte. and Morningstar Inc. claim that REITs have doubled in value in 2019. The analysts believe that REITs are starting to become overvalued and this means that their performance will likely start to diminish very soon.
This year has also seen an 18% surge in the FTSE Straits Times Real Estate Investment Trust Index which hit its highest level since 2007 a week ago. Morningstar analyst Ken Foong warned that investors should exercise caution when investing in REITs because most of them are now overvalued.
As far as the REITs performance in Singapore within the first half of 2019, the SGX S-REIT 20 Index which consists of the top 20 REITs in the country demonstrated a 10.3% increase in price. However, the price did seem to underperform, especially compared to the previous quarter.
Are Singapore’s REITs too pricey?
Singapore REITs may indeed be shifting towards being too pricey and this might be true considering that analysts feel that they have become overpriced. Looking at their performance over the past two to three years reveals that they have grown immensely popular and have been attracting a lot of investors. This is because they present an easier entry into real estate investment.
Unfortunately, the increasing popularity of REITs is also leading to their overvaluation. Some analysts are concerned that investors will end up being disappointed by fewer yields than anticipated. REITs are also at the risk of sell-offs in the short-term.
What does the current situation for Singapore REITs mean for investors?
As noted earlier, REITs have been in high gear this year and have been attracting a lot of investors. There are, however, some concerns–especially by investors about investing in REITs. The perpetual success of a REIT depends on the business that it backs. For example, if a real estate REIT develops a mall that is strategically located and manages to achieve critical mass for occupancy, then investors will likely get good returns.
A REIT’s success will thus depend on numerous factors such as strategic planning and their ability to generate revenue from their investment planning, among other factors. Singapore has a very mature property market that has encouraged the creation of many REITs to tap into the needs of the market while providing investment opportunities. Singapore REITs will, therefore, continue to perform as long as the real estate market continues to offer good returns.
What should analysts expect from Singapore REITs in the future?
DBS Group Holdings Ltd. and UBS Global Wealth maintain a positive outlook on the market at a time when many are starting to adopt a negative opinion about the future of REITs in Singapore. Jason Low of DBS Group believes that Singapore is probably the country with the highest REIT yields in the world. Singapore REITs will probably continue to offer attractive yields well into the future, thus remaining an attractive option for investors.
One of the reasons why Singapore REITs are very popular is that they focus heavily on property investments and delivering high distribution yields. However, the massive surge that has been experienced this year also leaves room for speculation or fear that the Singapore REITs market might also start declining at some point.
Investment-level bonds in the country decline to unattractive yield levels, forcing investors to look for alternative investment options such as REITs. However, some experts now believe that the REITs rally has gone on for far too long, thus questioning their ability to remain profitable in the long-haul.
The best performing REITs in Singapore in 2019
For those still interested in Singapore’s REITs, here are some of the best performing one that might be attractive options.
- CapitaLand Commercial Trust– This Singapore-based REIT had a unit price of S$1.92 in May this year with a dividend rate of 4.7% and its year-to-date annual return for the year was 12.3%.
- Frasers Commercial Trust– unit price in May was S$1.47.
- Keppel REIT– it has operations in Australia and Singapore and its unit price as of May was $1.21 with a 4.7% dividend yield.
- OUE Commercial REIT– it has operations in Singapore and China, with a unit price of $0.49 and a 6.9% dividend yield.
To put to perspective the growth of REITs in Singapore, CapitaLand Commercial Trust, and other REITs such as Ascendas REIT and CapitaLand Mall Trust run at 1.2 times the value of their assets excluding debt. They operate at such a high ratio because REITs usually trade on book value rather than face value.
Some of the other REITs that trade at a substantially higher level than their book value include Frasers Centrepoint Trust and Mapletree Commercial Trust. There are numerous analysts that have a sell rating on REITs considering their high performance lately.
GCP Global investment firm chairman Gabriel Yap believes that it is not right to speculate future performance simply based on historical data. There are other factors to consider about the performance of REITs such as the influence of new acquisitions and the impact of interest rate changes.
The GCP Global executive believes that it is important to consider the dynamics of supply and demand, as well as interest rate cut decisions by central banks before making a final verdict on REIT direction. The current conditions in Singapore seem to be favoring the strong performance of REITs but it is not clear how long that will continue happening.
In the meantime, investors get to enjoy attractive returns from Singapore’s real estate market through REITs. Whatever the case will be for Singapore REITs, there are still many opportunities to be had, but investors need to be critical in their selection process when deciding which REIT to invest in. Also worth noting is that there are still new REITs coming up in Singapore, thus presenting more opportunities.