Two REITs Investment Forums were hosted by The Edge Singapore on Aug 21 and Aug 28 as part of the “REITs Reiterated” supplement. The events brought together experts to discuss the future of real estate investment trusts (REITs) amid a changing economic landscape.
Key speakers included Ronald Tan, vice-president, equity capital markets, Singapore Exchange
Click here to learn more insights about REITs from the REITs Reiterated series.
The importance of REITs
Geoff Howie, market strategist at Singapore Exchange (SGX), opened the forums by emphasising the critical role that Singapore’s REIT market plays in the local economy. He highlighted that the 39 REITs and property trusts listed on SGX span various sectors, including industrial, retail, hospitality and commercial. They collectively represent about $90 billion in market capitalisation, accounting for 10% of Singapore’s total market. Remarkably, 18 cents of every dollar traded on the exchange is tied to these REITs, underscoring their importance.
Despite current challenges, such as the strong Singapore dollar leading to unfavourable currency translations — especially for REITs with assets in countries like Indonesia and Malaysia, the REIT market remains resilient. Howie noted that the average gearing ratio across these REITs stands at 39%, reflecting a balanced and diversified investment approach both geographically and sectorally.
See also: Lendlease Global Commercial REIT marks fifth listing anniversary with strong ESG focus
Furthermore, he pointed out that the iEdge S-REIT Index, which tracks 31 of the 39 listed REITs, currently trades around 15% below its book value — a divergence from its five-year average. Several factors, including the global impact of US interest rates, drive this discount. Still, it is offset by sustained occupancy rates, positive rental reversions, and the ability of REITs to undertake accretive transactions and asset enhancement initiatives (AEIs).
Joshi of REITAS, the Aug 21 forum moderator, said in her opening address that REITs have learned to navigate various crises — the banking crisis back in 2008, the Covid-19 pandemic, and now the interest rate cycle.
“The rate cut is for real this time and the issues that have made high interest rates challenging are unwinding. We should see a better environment for REITs and an improvement in their unit prices,” Joshi says.
See also: CapitaLand China Trust remains the best proxy for a Chinese recovery
With high interest rates and high distribution per unit (DPU) yields, it was difficult for REITs to acquire, so they focused on AEIs and redevelopment. REITs divested their older properties to acquire newer properties with up-to-date specifications.
The focus on sustainability is likely to increase. “Access to capital is easier with a green building. REIT managers needing to attract and retain quality tenants must have sustainability features to defend their revenue streams. They will also save on energy bills and improve their net property income (NPI),” Joshi adds.
Fed’s Influence on REITs
On Aug 23, US Federal Reserve Chairman Jerome Powell announced that inflation is on track to return to 2%, signalling a potential rate cut. This announcement is seen as a significant development for Singapore’s REIT market. Ronald Tan of SGX believes this could trigger a revival in Singapore’s IPO market, particularly for REITs. Singapore’s last REIT IPO was Digital Core REIT in December 2021 and there has been a dearth of new listings since then. However, with the prospect of lower interest rates, the outlook for REIT IPOs has improved.
Tan emphasised that the potential for lower interest rates would enable banks and REIT sponsors to price new IPOs more effectively. He suggested that this could lead to new issuances, particularly in asset classes that are currently gaining popularity, such as modern logistics properties, data centres, life sciences and healthcare. Tan estimates that it could take around six months for these new issuances to come to market.
In general, interest rates affect REITs in three main ways. First, policy rates affect risk-free rates and the unit prices of REITs are measured by a spread between the REIT’s DPU yield and the risk-free rate. Interest rate levels affect a REIT’s cost of debt and interest expense, which are their largest costs. Interest rates also affect capitalisation and discount rates, which are used for investment property valuations.
Ooi of NUS provided a deeper analysis of how interest rates impact REIT valuations. He explained that REITs can be viewed as real estate entities valued based on net asset value (NAV) or equities, valued using a dividend discount model (DDM). The DDM suggests that lower interest rates reduce the required rate of return, which in turn could lead to higher REIT unit prices. Conversely, REIT distributions tend to decrease during periods of higher interest rates, leading to lower unit prices. This is because higher interest rates increase the required rate of return, making REITs less attractive compared to other investments.
For more stories about where money flows, click here for Capital Section
Ooi also pointed out that if REITs are considered a collection of real estate assets, their valuation would be based on future cash flows, highlighting the importance of understanding investment properties valued using discounted cash flow (DCF) methods. He argued that if REITs are viewed as equities, investors would focus more on the income or distribution flow over time, making the income-based valuation more relevant.
Navigating challenges in the REIT sector
Chui of ESR-LOGOS REIT outlined the challenges of managing a REIT with a portfolio of industrial assets. He stressed that interest rates play a crucial role in determining the performance of industrial REITs. Lower interest rates would reduce funding costs and increase DPUs over time, benefiting REIT valuations. Chui also emphasised that while the announcement of a rate cut has yet to materialise, the anticipation alone could improve business sentiment and positively impact landlords with industrial properties.
Chui elaborated on the broader challenges facing industrial REITs, including business cycles, obsolescence and evolving technology. He noted that industrial assets are particularly susceptible to wear and tear, and their lifespan is generally shorter than other types of real estate. As a result, constant rejuvenation of assets is necessary. Chui detailed his four-pronged strategy, which includes rejuvenation, recycling, recapitalising and reinforcing the sponsor’s commitment.
For instance, ESR-LOGOS REIT is redeveloping its Cold Hub and has recycled $440 million of older assets. “We are always subjected to the cycles and macro factors such as the economy and government policies. Increasingly for the industrial sector, technology is important, because if the technology changes too fast, the asset can become obsolete,” Chui says.
“The wear and tear of industrial assets are quite pronounced, and the life span of industrial assets is shorter, so we need to rejuvenate our assets. We undertake asset enhancement initiatives and redevelopment,” he adds.
Chui also highlighted the growing importance of environmental, social and governance (ESG) considerations, noting that while ESG initiatives may lead to lower returns, they are increasingly becoming a priority for investors.
Chow of Lendlease Global Commercial REIT addressed the complexities of managing overseas assets. While overseas investments offer diversification benefits, they also come with inherent risks that require careful management and deep local expertise. Chow emphasised the importance of maintaining a balanced portfolio and being prepared to divest non-performing assets when necessary. He provided an example of how Lendlease REIT restructured a Milan lease to convert a building into a multi-tenanted property, which is expected to generate higher rental income.
Tan Tze Wooi of CLCT discussed the challenges of operating in China, particularly in light of geopolitical tensions and the weakening Chinese yuan, which has negatively impacted distributions. Secondly, in the past, institutions were major investors in CLCT. Geopolitical tensions have resulted in fund managers divesting their Chinese investments.
Despite these challenges, CLCT has focused on reconstituting its portfolio, enhancing weaker malls, acquiring five business parks from its sponsor and diversifying into logistics properties. Tze Wooi expressed optimism about the future, noting that interest rates in China are normalising and that CLCT is shifting more of its borrowings into renminbi to capitalise on interest rate savings.
“There are also very good opportunities in the Chinese domestic market and we would like to focus our energy on what we can control,” Tze Wooi says. “We have been reconstituting our portfolio. We want to play in the retail space because post covid, our portfolio is shaping up to capture the normalisation in consumer spending; and occupancy of our retail malls is in the high 90s.”
Sector-specific strategies and opportunities
Liaw of Elite UK REIT shared insights into managing a portfolio that relies heavily on government cash flows in the UK. The UK government, being a reliable tenant, often pays rents in advance, providing stability to Elite UK REIT’s portfolio of 150 properties. Liaw explained that the REIT was rebranded from Elite Commercial REIT to Elite UK REIT to reflect a broader focus on social infrastructure and an expanding mandate in the living sector. He also noted that the Bank of England has begun easing interest rates, which has positively impacted the REIT’s refinancing efforts, with all debts due between 2024 and 2026 already refinanced.
Liaw highlighted that Elite UK REIT’s trading price is in sterling, and its rental revenue and DPU are also in sterling, which mitigates exposure to forex risks. He emphasised the importance of focusing on delivering in the living sector and divesting vacant properties to stabilise valuations further. The REIT’s portfolio value increased by 0.6% to GBP415 million ($712 million) as of June 30, compared to Dec 31, 2023, reflecting the effectiveness of the manager’s strategy.
Shankar of CLINT shared his approach to delivering consistent DPU growth. His strategy includes sourcing assets at a discount, with a strategy described as forward purchases, and maintaining a focus on sustainability. Shankar emphasised that CLINT’s ability to acquire assets at a 15%–20% discount to market value, coupled with the sponsor’s world-class design abilities and access to capital, has been instrumental in driving net property income growth. He also highlighted the trust’s ability to book revaluation gains.
Shankar pointed out that CLINT is in an enviable position due to its access to property, low development risk, and potential for revaluation gains as properties stabilise. He noted that CLINT’s diversified approach to acquisitions — sourcing assets from sponsors, third parties, and developing new products — has resulted in steady growth in net property income in both Indian rupees and Singapore dollars.
REITs remained resilient
The forums underscored the resilience of Singapore’s REIT market. During the interest rate upcycle, only five S-REITs and one property trust, all with 100% of overseas properties, halted or drastically cut distributions. The majority maintained their distributions. With the Fed’s pivot, the potential for DPU growth as economic conditions stabilise is being articulated by REIT managers.
The anticipated rate cuts by the Fed are expected to be a significant catalyst for both new REIT IPOs and improved trading prices for existing REITs. However, the forums also highlighted the importance of strategic asset management, diversification, and adapting to evolving market conditions to ensure continued success in the REIT sector.
As Singapore’s REIT market continues to navigate external economic challenges, the insights shared by industry leaders at the forums provide a valuable framework for investors. The consensus is clear: while challenges remain, the sector’s underlying fundamentals are strong, and the growth potential is significant, particularly with the expected easing of interest rates.
