Singapore property owners have spent a long time languishing in the shadow of the chart-topping performance of the island’s banks. But with US Federal Reserve Chair Jerome Powell signaling the start of monetary easing from next month, the landlords’ day in the sun may not be far away.
Higher-for-longer global interest rates pumped up the profitability of loans at Singapore’s three homegrown banks. Last year, DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. and United Overseas Bank U11 Ltd. distributed a combined $11.3 billion in dividends, double the 2020 payout. This year, too, DBS has been generous in sharing the spoils of high net interest margins with investors. There hasn’t been much reason — yet — for the lenders to make aggressive provisions for loan losses.
Contrast this bounty with the lackluster performance of real-estate investment trusts.
The members of Singapore’s REIT index have together distributed between $5 billion and $5.5 billion annually to unitholders over the past three years, roughly $1 billion more than what they were paying out as they were being hobbled by Covid-19. The elevated interest cost of the post-pandemic era has been a pain point. Property owners have “taken a big hit from asset impairments over the past 12-18 months, especially for their overseas properties,” OCBC Investment Research said in a recent note.
But as interest rates begin to ease, the outlook for both profit and dividend distribution is going to change. Banks will most likely eke out a thinner margin on loans, and they’ll perhaps have to make higher provisions for soured corporate debt, even as REITs get a breather on their cost of financing. Lower expenses will mean more of the rental income flowing to investors. OCBC analysts expect the median Singapore REIT tracked by them to pay 2.9% more per unit next financial year.
From nursing homes in Japan to data centres in Ireland and Trader Joe’s grocery stores in the US, Singapore REITs give investors access to all sorts of rental streams. Even the landlords exposed to the worst segment of all — the US office market — are beginning to see a ray of hope.
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Take Prime US REIT. The trust recently sold One Town Center in Boca Raton, refinanced a credit facility, and managed to shore up the 47% occupancy of its office building in suburban Virginia to 61% by winning a law firm as a tenant. The price-to-book-value ratio has ticked up higher to 0.34x, from under 0.2x same time last year.
Even then, the excess inventory in the US office market may take years to clear. The American shopper, however, is holding up well, with consumer expectations for the next six months rising to a one-year high. United Hampshire US REIT ODBU , a Singapore trust anchored by US shopping centres and self-storage outlets, won a new 10-year tenancy from Dick’s Sporting Goods Inc. recently. Take away the overhang of high interest rates, and this year’s drop in the payout to unitholders should switch to growth.
For REITs that have leverage under control, cheaper capital may even pave the way to scooping up new properties. Healthcare-focused Parkway Life Real Estate Investment Trust acquired a nursing home in Osaka Prefecture last month, an obvious bet on Japan’s rich, aging society.
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Within the home market, the office segment is looking jaded because of oversupply. Thanks to the craze for generative artificial intelligence, hosting bits of bytes of data as tenants makes more sense than renting properties to officegoers.
In retail and hospitality, though, Singapore landlords may continue to find the local market more attractive, thanks to low unemployment and steady tourist arrivals. The government expects the economy to expand between 2% and 3% this year, in the upper range of its 1% to 3% forecast. Fresh leases at VivoCity, a local mall owned by Mapletree Pan Asia Commercial Trust N2IU , were signed last quarter at nearly a 20% premium over expiring agreements. At Festival Walk, a Hong Kong shopping venue owned by the same REIT, new leases fetched a 5% discount. Hong Kong residents are increasingly spending their money in mainland China, while more Chinese visitors make a trip to Singapore.
More often than not, Singapore property owners do well in the stock market when local long-term rates begin to slide from their peak, as OCBC’s research analyzing nine such episodes shows. In six of them, REITs have produced excess returns over the benchmark Straits Times Index. This time around, however, the yield on 10-year Singapore government notes has cooled from its October 2022 high. Yet, the REITs haven’t done much, while stocks, led by banks, have been shining bright. That could change. Once short-term US rates start moving lower, it will be time for banks to retreat — and for landlords to step out of their shadow.
