Undoubtedly, you’ve by now seen at least one or more editorials, advertisements or talks extolling the virtues of S-REITs as an investment vehicle.
As S-REITs currently hold one of the highest proportions (over 10%) on Singapore’s stock market by market cap when compared to several other major exchanges, it should come as no surprise that much talk about equities and investing in Singapore should be uniquely focused on covering REITs.
As it stands, S-REITs are by now perhaps most famously known for benefits such as exposure to Singapore or foreign property sectors and relatively high dividend yields. For instance, the Straits Times Index (STI) offers a dividend yield of just over 3%, while S-REITs in Singapore are yielding well over 5%.
However, you may be finding yourself wanting more information before deciding to invest in either the “usual” stocks listed on the Singapore Exchange (SGX) or S-REITs instead.
To be clear, it is unlikely that this will be an “either/or” choice for most investors. S-REITs and Singapore-based equities are different kinds of investments with their own roles to serve in an investor’s portfolio, both offering differing risk profiles and structures that appeal to various investors based on their individual goals and needs.
S-REITs are often attractive because they offer portfolio diversification
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To begin with, when looking at the five-year correlation of S-REITs and Singapore equity benchmarks, S-REITs do tend to offer slightly diversified exposure from Asian and emerging market equities (although it offers virtually similar correlation with the US stock market), allowing investors to gain exposure to Singapore and Asianfocused REITs with lower exposure to events such as the sell-off in Chinese stocks earlier this year.
When accounting for how many S-REITs do cover properties across a few sectors at a time — commonly commercial (office) and retail, in particular, many S-REITs offer “instantly” diversified exposure from the onset, making it even more attractive to some investors.
Chart 1 can be interpreted as such — as the ratio of the equity index (i.e. the STI or the SIMSCI) falls against the iEdge S-REIT Leaders Index, it represents increasing outperformance of S-REITs over that of stocks listed on the respective equity indices.
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For clarity, the iEdge S-REIT index itself is widely seen as a benchmark for S-REIT performance in Singapore. Furthermore, it may be worth noting that while it may be a useful benchmark, the MSCI Singapore (commonly referred to as the SIMSCI) currently consists of only 19 stocks (there are over 700 listed on the SGX) while the STI is made up of 30 blue-chips from the SGX that are among the largest and most actively traded on the overall exchange.
While both indices do contain some REITs, they are largely weighted away from S-REITs in general, with the exception of some blue-chips such as Ascendas REIT — that can be found in the SIMSCI.
With that in mind, we can make two observations — first that S-REITs appear to have been steadily outperforming Singapore equities in general, particularly between 2018 to 2020.
Second, Covid-19 recovery hopes since end-2020 seem to have benefited Singapore equities more than that of S-REITs, although that period of outperformance seems to have been put on hold for now.
Looking ahead, while it is difficult to say if the economy moving towards a post-pandemic phase (hopefully) will continue to see S-REITs continue to outperform Singapore equities in general, have weathered Covid-19 relatively well.
S-REITs have shown resilience
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S-REITs have come a long way after crashing nearly 40% in March 2020 over Covid-19 fears, and broadly speaking, are trading below pre-pandemic levels currently. For clarity, Chart 2 shows that both S-REITs in general and the STI continue to trade below December 2019 levels.
S-REITs have shown resilience in the face of the pandemic since that cratering in investor sentiment, with many maintaining high occupancy rates, continued revenue from rental collection, and high regular trading volume on the SGX.
Furthermore, S-REITs may play a useful part in reducing overall portfolio volatility. From Chart 2, we can observe that price movements in S-REITs (in green) has been relatively more muted than that of the STI since the March 2020 sell-off as well.
And are looking healthy enough to weather interest rate hikes as well
Zooming out beyond Singapore for a moment, markets across the world are increasingly pricing in a further tightening monetary policy regimes abroad, with the US Federal Reserve Board increasingly expected to execute two or more rate hikes next year.
The reason for this rush and constant revision of rate hike targets is largely due to worryingly high price increases across several economies that have risen relentlessly over much of 2021 and while it remains a million-dollar question if inflation is truly as transitory as many central bankers say it is, market participants are increasingly betting that central banks will be forced to taper much earlier than they are declaring currently
Amid such accelerating rate hike expectations, REITs, in general, are expected to be negatively impacted. Higher interest rates will directly increase debt financing costs for REITs, directly affecting their DPU (how much in dividends an investor receives for every unit of a REIT owned) and making REITs less attractive to investors.
Assessing an S-REITs multiples/ ratios is a basic practice
However, not all REITs are built the same. Based on the above explanation, it is plain to infer that REITs with lower debt loads will likely weather interest rate hikes better and for that, we can refer to the REIT’s gearing ratios, a formula that tells us the ratio of a REIT’s total debt to its total assets.
While the Monetary Authority of Singapore (MAS) has imposed a gearing ratio limit of 50% (used to be 45% pre-Covid) on S-REITs, Singapore’s largest REIT by market cap — Ascendas REIT has a gearing ratio of just over 37.4% while other S-REITs such as Sasseur REIT have gearing ratios as low as 27.8%.
Apart from that, investors and analysts typically look at interest coverage ratios (measuring the ability of the REIT to pay its debts) — and with many S-REITs falling well below the MAS-imposed limit, it is likely that the sector is well-poised to weather any interest rate hikes over the next few years.
A final consideration: Total returns
Overall, the Singapore stock market’s tilt towards higher-yielding REITs in recent years is clearly no fluke, but part of a continuing and deliberate move into offering ever-higher yields and similar sweeteners amidst surging interest from investors.
Despite said rising popularity with retail and institutional investors alike, however, one should not ignore other critical aspects of investible assets, such as the total returns that they deliver. And in total returns, the track record of the STI and S-REITs are perhaps plain for everyone to see.
As a final comparison, while the benchmark S&P500 offers a dividend yield of around 1.3% currently, it has surged over 40% since the beginning of 2020 even when accounting for the Covid-19 crash, while the STI and S-REITs have only just barely begun to clear their pre-pandemic price levels.
Mooris Tjioe is an investment analyst with Phillip Futures
Photo: Samuel Isaac Chua/The Edge Singapore
