S-REITs look promising in a reopening scenario April 29, 2022
S-REITS are looking attractive in 2022 and investors are flocking to acquire a piece of the sector, not only for its stability and low risk but for its potential to produce dividends. Although 2021 saw strict COVID-19 lockdown measures and regulations, S-REITs averaged an annual 6% return – capturing the attention of investors in2022.1
The main factors likely to help S-REITS improve their performance as the COVID-19 pandemic wanes are the return of workers to their offices, the recovery of the retail sector and the revival of the hospitality industry.
Office Workers Returning to Offices
The return to office is expected to allow tenants to better evaluate their space needs and result in a pickup in leasing momentum (more decisive renewal discussions but could also result in negative outcomes like downsizing).
Co-working is also likely to have an impact on how the S-REITS perform, as co-working operators are usually tenants of the S-REIT. They lease space from S-REITS (e.g. WeWork leased 21 Collyer Quay from CICT) and pay rent regardless their current occupancy/subscription. And while that helps to fill asset/portfolio occupancy, they indirectly compete with the S-REITS for tenants. As such, tenants who used to lease office space from the S-REITS, and who are now transitioning to co-working will no longer lease space directly from the S-REIT.
Additionally, delays in the completion of new office buildings due to manpower disruptions for the past two years have caused office demand to remain tight.
Separately, Mr Alan Cheong, Executive Director of Research and Consultancy at Savills Singapore, told CNA in late March 2022 that landlords of older buildings will potentially take their properties off the market for redevelopment or refitting, which could see a surge in the cost of office rents due to a spatial crunch derived from a mass return of office workers to CBD areas.2
Besides the return to office, the easing of COVID-19 measures for dine-in groups, atrium sales, the increase in venue capacity limits and sale of alcoholic beverages will benefit the retail sector.
Since 29 March 2022, the dine-in group size has been raised from 5 to 10, atrium sales will resume, capacity limits have been increased to 75% of venue capacity or 1000 pax, and the sale and consumption of alcohol in public bars/merchants is now permitted after 10.30 pm.
These measures have been a huge restraint and hindrance to the public’s daily lives – so understandably, a sharp hike in footfall in popular retail areas such as shopping malls and Clarke Quay/Boat Quay is largely expected.
According to Natalie Ong, Research Analyst at Phillip Securities Research, in her Singapore REITs Monthly report dated 13 April 2022: “(The) return to office and larger dine-in group sizes should help draw more footfall to malls and uplift tenant sales for both suburban and downtown malls. The Jan22 retail and F&B sales have recovered, coming in 1.8% and 5.9% below Jan19 levels.3
The relaxation of COVID-19 travel restrictions is also expected to give Singapore’s hospitality sector a boost.
Since 1 April 2022, entry into Singapore no longer requires quarantine for vaccinated travellers and they are subjected only to a pre-departure test. But analysts expect the sector to have a long road to recovery. The World Tourism Organization estimates that the industry may only return to pre-COVID-19 levels in 2024.4
Some things to consider before investing in REITS
Typically, REITs offer stable passive income with average return of4 to 8% annually. But there are many ways to deduce the performance a REIT stock and to pick out the best performing ones. Terminologies to familarise yourself with when analysing REITs include
- Dividend payouts – REITs are required to pay at least 90% of their income as dividends. High dividends do not necessarily equate to a good performing Reit. At times, a high dividend yield could potentially mean that a company’s share price has dropped significantly. Offshore S-REIT typically offer higher dividend yields compared to their Singapore-focused counterparts to compensate for the risk associated with owning overseas assets.
- Occupancy rate – This refers to the ratio of rented space against the total amount of available space. Investors should identify if an asset’s lower occupancy is transitionary or indication of structural shift or oversupply, implying that softer leasing demand is expected to persist.
- Price-to-NAV (P/NAV) – A P/NAV below/above 1.0x implies that the REIT is trading at a discount/premium to NAV. Subsectors like industrial trade at a premium as investors ascribe premiums to asset class with lower earnings volatility. On the other hand, hospitality REITs tend to trade at a discount to NAV due to the greater perceived risk associated with the asset class.
- Net property income (NPI) – Gross revenues less operational costs and related expenses.
- Aggregate leverage – Commonly referred to as gearing, the aggregate leverage shows the REITs’ debt-to-asset ratio. This is essential because a low aggregate leverage ratio means that a REIT is able to take on more debt. In contrast, a high aggregate leverage means that the REIT has more debt and might face difficulties fulfilling its interest obligation.5
REIT counters you could consider
CapitaLand Integrated Commercial Trust (CICT)
Widely known as Singapore’s largest diversified REIT, CapitaLand Integrated Commercial Trust (CICT) resulted from the merger between CapitaLand Mall Trust and CapitaLand Commercial Trust. CICT’s portfolio comprised Grade A office and retail assets. Approximately 92% of the portfolio is located in Singapore. Notable assets include Raffles City, Funan, Plaza Singapura, Tampines Mall, Bugis + and Bugis Junction, IMM Building and Grade A offices such as CapitaGreen, Capital Tower and Battery Road.6
Mapletree Industrial Trust
The industrial sector is also expected to perform well as Singapore reopen.
Phillip Securities Research Analyst Natalie Ong’s recommendation for the Industrials sector is OVERWEIGHT in her latest report on REITS on the stocksbnb.com (https://www.stocksbnb.com/reports/singapore-reits-monthly-green-shoots-all-around/)7
In her report, she said: ““Industrial REITs benefit from the secular growth of new economy tenants such as tech, life sciences, biomedical, semi-con and electronics manufacturing, which typically locate themselves in high-spec, science and business parks and warehouses.”
If you want to venture into this territory, one S-REIT to look at could be Mapletree Industrial Trust, an industrial S-REIT with a portfolio consisting of business parks buildings, data centres, high-tech centres, factories and others.8
Considering that the global workforce and students were working and studying at home during the COVID-19 pandemic, the significance of data centres and data traffic grew exponentially throughout the globe.9
Singapore’s first and largest listed industrial and business space REIT – Ascendas REIT is also an option you can look at. This S-REIT has a portfolio spread across different sectors and countries; with over 200 industrial, business and commercial properties in Singapore, United States, Australia and Europe. Furthermore, it has been acquiring new data centres, business centres and logistics facilities in Singapore and United States.
If you want to check out Phillip Securities Research Analyst’ Natalie Ong’s REIT picks for 2022 go to https://www.stocksbnb.com/wp-content/uploads/pdf/SREITsMonthly20220413.pdf10
For more information on S-REITS from our POEMS website, go to: https://www.poems.com.sg/s-reits/
About the author
Elston Soares is an editor with the Phillip Securities Research team.