Sustainable ESG Investing: How are REITs adapting to more sustainable practices? New Green REIT Index Launched

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In recent years, ESG (Environmental, Social and Governance) Investing has come into the forefront. As investors become more aware of the impact business have on climate change, so will their view towards businesses with more sustainable practices.

Several Singaporean corporations have already been recognised for their sustainability efforts, including Capitaland Limited and Cromwell European REIT.

   

MUST Go Green 2021


Manulife US Real Estate Investment Trust (“MUST”) launched its week-long thought leadership initiative on October 5, 2021 to raise understanding of ESG and how mandatory climate-related disclosures for Singapore financial institutions and asset managers from 2022 will impact REITs and investors. The event, titled MUST Go Green 2021, a thought leadership initiative under its Green Dot Series, includes ESG conferences with industry experts, as well as one-on-one meetings with ESG investors. Both conferences today received an eager response and were well-attended by media, analysts as well as institutional and retail investors.

To learn more about ESG Investing, and how MUST is working to achieve net-zero, the recordings to both conferences are now available here: http://manulifeusreit.listedcompany.com/videos.html

With regards to the webinar, Kenny Loh, founder of MyStocksInvesting.com has asked 2 questions on behalf of investors. We thank Ms Jill Smith, CEO of Manulife US REIT for getting back to us on the following questions.

   

1. What is the financial impact of being green? In the short term vs in the long run? (E.g.  Implementation costs vs cost savings) 


  • With the real estate sector contributing to about 40% of carbon emissions, green buildings need to positively impact the natural environment in their design, construction, and  operations.  
  • When it comes to greening a building or portfolio, there is always the challenge of balancing environmental sustainability with economic viability. The bulk of ESG costs lie in the ‘E’ aspect of greening a building (e.g. improving building energy efficiency through  optimising equipment and processes). On average, construction or retrofitting costs for a  LEED-certified building is about 7% to 9% higher than that for a non-LEED building. 
  • Green buildings run more efficiently, thus lowering operating costs. For MUST, our portfolio has registered lower energy and emissions intensities in 2020 compared to the other U.S. REITs, translating to lower costs and sustainable returns. Compared to  conventional non-green buildings, they usually have higher occupancies, fetch a higher  rental and command a higher selling price. A recent survey by JLL also showed that the value of LEED assets (US$/psf) was 21.4% higher vs non-LEED buildings. 
  • Beyond financial returns, green buildings have health benefits for occupants in terms of  better air quality, accessibility, etc. In 2020, MUST’s Michelson property located in Irvine, California achieved the Fitwel Building certification. Fitwel is the world’s leading certification for healthy building performance based on building features that promote  occupants’ health and well-being. 
  • Green buildings also help us attract and retain quality and ESG like-minded tenants such as government and top-tier corporates in their sustainability journey or their race to Net Zero. In major U.S. cities, only about 14% of buildings are certified green. Since the start of  the pandemic, there is an increased demand for such green buildings by tenants. Within our portfolio, we have also received requests from tenants to discuss the ESG  performance of our buildings to ensure they meet with their own sustainability criteria. 
  • On the operation front, having ‘green’ certified buildings could also lower the REIT’s tax expenses. For instance, in New York, LEED-certified buildings are exempted from a portion  of their local property taxes. 
  • Many U.S. states and local regulators are incentivising energy efficient buildings and  penalising carbon emitters, which means that the cost of owning non-green buildings that do not meet regulatory requirements is going to increase down the road. For example, starting in 2024, New York City has mandated large building owners to drastically limit carbon emissions or pay an annual fine of US$268 per metric ton of CO2 over the limit.  
  • Closer to home, Singapore has also set ambitious targets under its Singapore Green Building Masterplan to green 80% of its buildings and pursue ‘best-in-class’ standards for new and existing buildings.  
  • As recently shared in our MUST Go Green event, net inflows into sustainable funds for  2020 has grown +109% YoY to US$347b. By 2023, 80% of investors intend to incorporate  ESG into their investment strategy. 
  • The cost of ignoring or paying lip service to ESG is high. Not only will we miss this new wave of ESG investors, we will also end up with stranded assets that deplete property values and returns for investors, causing brand erosion.
   

2. Given the lack of one consistent ESG rating used across REITs, what will be the outlook and approach for Singapore?


  • A recent Business Times article highlighted that issuers in Singapore grapple with trying to reconcile various ESG reporting standards as well as transparency issues within rating methodologies, among other challenges, within the resource-limited environment where they operate.  
  • ESG-related information that can negatively impact the financial performance of an organisation and its stakeholders are considered material and thus, should be disclosed. We think that this is precisely why the Monetary Authority of Singapore has mandated such reporting according to the Taskforce on Climate-related Financial Disclosures (TCFD)  framework for all financial institutions and asset managers (including REITs) with effect  from 2022.  
  • A common framework will allow for reliable and comparable climate-related disclosures,  leading to better pricing of climate-related risks and more effective risk management and capital allocation towards financing green activities.  
  • A prescribed recommended framework to guide all sustainability reporting will help to streamline the current confusion about ESG ratings and rankings. This will also allow for more comparability of sustainability performance among peers. 
  • Come 2022, MUST will incorporate further disclosures on its climate-related strategy,  targets and performance, in alignment with the TCFD framework. We will also be participating in TCFD-aligned ratings such as CDP and adopting preferred standards such as SASB (Sustainability Accounting Standards Board) which is commonly used in countries  such as the U.S., Australia, Japan and South Korea.
  • Good ratings on notable global sustainability benchmarks will align our sustainability performance to global best practice, and through ongoing gap analyses, we will continue to identify potential risks and opportunities in our pursuit of ESG excellence.
   

New REIT index: iEdge-UOB APAC Yield Focus Green REIT Index


On October 15, 2021, Singapore Exchange and UOB Asset Management launched the  iEdge-UOB APAC Yield Focus Green REIT Index. Formerly known as the Global Real Estate Sustainability Benchmark (GRESB, this REIT index is weighted based on environmental performance, based on a tilting methodology. Click on the image below to view the factsheet of this new REIT Index.

Kenny Loh is a Senior Financial Advisory Manager and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.  You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement

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Podcast: Using REITs for Retirement Planning

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The Financial Coconut Podcast: Using REITs for Retirement Planning 

REITs (Real Estate Investment Trusts) have always been a popular investment choice among many retail investors. How do we incorporate REITs in our retirement planning as well? Can REITs be part of our Covid-19 recovery play? What are some ways to evaluate REITs and what are some global REITs to look out for? Explore the world of REITs with Kenny Loh, REIT specialist and independent financial advisor in this week’s Chills with TFC!

Listen on to this Podcast on Spotify, or on Youtube (below).

If you have the following concerns over your Retirement Planning, feel free to schedule a complimentary consultation with me here.

  • Do not know how much I need for retirement?
  • Do not know whether you can retire at the age you plan?
  • How long do I need to work before I can retire?
  • I do not know whether I have sufficient retirement fund to last for my whole life?
  • I have done my retirement planning, I need a 3rd part independent review with no products selling.
  • I cannot afford to make mistake in my retirement planning as this is the only asset I have to last me for the next 30-40 years. I need someone to point out what are my weakness in my retirement planning.
  • I am very worried that my retirement funds eroded by inflation, how to make my retirement portfolio beats inflation?
  • I have not done my retirement plan yet, I need someone to provide me independent and unbiased advice on what actions should I take.

Kenny Loh is a Senior Consultant and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.  You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement

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Singapore REIT Monthly Update (Oct 05 – 2021)

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Technical Analysis of FTSE ST REIT Index (FSTAS351020)

FTSE ST Real Estate Investment Trusts (FTSE ST REIT Index) decreased slightly from 876.88 to 842.13 (-3.96%) compared to the last month update. Currently the Singapore REIT index is still trading with a range between 816 and 890.

  • As for now, Short term direction: Sideway.
  • Immediate Support at 816, followed by 775.
  • Immediate Resistance at 890.

Previous chart on FTSE ST REIT index can be found in the last post: Singapore REIT Fundamental Comparison Table on September 4, 2021.

Fundamental Analysis of 38 Singapore REITs

The following is the compilation of 38 Singapore REITs with colour coding of the Distribution Yield, Gearing Ratio and Price to NAV Ratio.

  • Note 1: The Financial Ratio are based on past data and there are lagging indicators.
  • Note 2: This REIT table takes into account the dividend cuts due to the COVID-19 outbreak. Yield is calculated trailing twelve months (ttm), therefore REITs with delayed payouts might have lower displayed yields, thus yield displayed might be lower.
  • Note 3: All REITs have been updated with Q2 2021 business updates/earnings.

(Source: https://stocks.cafe/kenny/advanced)

  • Price/NAV decreased to 1.01
    • Increased from 1.06 in September 2021.
    • Singapore Overall REIT sector is at fair value now.
    • Take note that NAV is adjusted downward for most REITs due to drop in rental income during the pandemic (Property valuation is done using DCF model or comparative model)
  • TTM Distribution Yield increased to 5.79%
    • Increased from 5.55% in September 2021.
    • 10 of 38 (26.3%) Singapore REITs have distribution yields of above 7%.
    • Do take note that these yield numbers are based on current prices taking into account the delayed distribution/dividend cuts due to COVID-19, and post circuit breaker recovery.
  • Gearing Ratio remained at 37.41% 
    • Almost no change from 37.40% in September 2021.
    • Gearing Ratios are updated quarterly. Hence there is little change to the Gearing Ratio compared to September’s update.
    • In general, Singapore REITs sector gearing ratio is healthy but increased due to the reduction of the valuation of portfolios and an increase in borrowing due to Covid-19.
  • Most overvalued REITs (based on Price/NAV)
    • Parkway Life REIT (Price/NAV = 2.32)
    • Keppel DC REIT (Price/NAV = 2.02)
    • Mapletree Industrial Trust (Price/NAV = 1.58)
    • Mapletree Logistics Trust (Price/NAV = 1.52)
    • ARA LOGOS Logistics Trust (Price/NAV = 1.35)
    • Frasers Logistics and Commercial Trust (Price/NAV = 1.32)
    • Ascendas REIT (Price/NAV = 1.31)
  • Most undervalued REITs (based on Price/NAV)
    • Lippo Malls Indonesia Retail Trust (Price/NAV = 0.53)
    • BHG Retail REIT (Price/NAV = 0.64)
    • Suntec REIT (Price/NAV = 0.68)
    • Frasers Hospitality Trust (Price/NAV = 0.69)
    • First REIT (Price/NAV = 0.73)
    • Far East Hospitality Trust (Price/NAV = 0.76)
  • Highest Distribution Yield REITs (ttm)
    • First REIT (12.35%)
    • United Hampshire REIT (9.07%)
    • Sabana REIT (8.77%)
    • Sasseur REIT (8.32%)
    • Keppel Pacific Oak US REIT (8.22%)
    • Prime US REIT (8.04%)
    • Reminder that these yield numbers are based on current prices taking into account delayed distribution/dividend cuts due to COVID-19.
    • Some REITs opted for semi-annual reporting and thus no quarterly DPU was announced.
  • Highest Gearing Ratio REITs
    • ARA Hospitality Trust (49.0%)
    • Suntec REIT (43.1%)
    • ESR REIT (42.9%)
    • Lippo Malls Retail Trust (42.5%)
    • Elite Commercial REIT (42.1%)
    • Frasers Hospitality Trust (42.1%)
    • Manulife US REIT (42.1%)
    • No change since September 2021 since Gearing Ratios are updated quarterly (All values are still Q2 2021 values)
  • Total Singapore REIT Market Capitalisation decreased by 3.75% to S$105.1 Billion.
    • Decreased from S$109.2 Billion in September 2021 2021.
  • Biggest Market Capitalisation REITs:
    • Capitaland Integrated Commercial Trust ($13.08B)
    • Ascendas REIT ($12.50B)
    • Mapletree Logistics Trust ($8.58B)
    • Mapletree Industrial Trust ($7.37B)
    • Mapletree Commercial Trust ($6.80B)
    • No change in Top 5 rankings since August 2021.
  • Smallest Market Capitalisation REITs:
    • BHG Retail REIT ($292M)
    • ARA Hospitality Trust ($374M)
    • Lippo Malls Indonesia Retail Trust ($391M)
    • First REIT ($410M)
    • United Hampshire REIT ($454M)
  • Eagle Hospitality Trust has been removed

Disclaimer: The above table is best used for “screening and shortlisting only”. It is NOT for investing (Buy / Sell) decision. If you need help to start building your own investment portfolio, or want a portfolio review, book a consultation with Kenny now! First consultation is free.

Top 20 Worst Performers of the Month (Sept 2021)

 (Source: https://stocks.cafe/kenny/advanced)

SG 10 Year & US 10 Year Government Bond Yield

  • SG 10 Year: 1.57% (increased from 1.39%)
  • US 10 Year: 1.47% (increased from 1.23%)

Summary

Fundamentally, the whole Singapore REITs landscape is currently at fair value due to the recent correction based on the average Price/NAV value of the S-REITs. Below is the market cap heat map for the past 1 month. Generally, most S-REITs in the past month have dropped in market cap. There are 2 outperformers though, Cromwell European Reit (+4.02%) and OUE Commercial REIT (+10.98%).

(Source: https://stocks.cafe/kenny/overview)

Yield spread (in reference to the 10 year Singapore government bond of 1.57% as of 2nd October 2021) widened slightly from 4.17% to 4.21%. The risk premium is attractive to accumulate Singapore REITs in stages to lock in the current price and to benefit from long-term yield after the recovery. Moving forward, it is expected that DPU will increase due to the recovery of global economy, as seen in the previous few earning updates. NAV is expected to be adjusted upward due to revaluation of the portfolio.

Technically the REIT Index is currently going through correction after failing to break the resistance zone at 875-890. Presently the market sentiment is slightly due to a few reasons (1) China Evergrande debt issue; (2) The potential rate hike by US Fed (3) Sept is a statistically volatile month (4) The continuous increasing trend of COVID19 cases in Singapore. 

You can listen to my monthly REIT radio interview on MoneyFM89.3 here.

However, current macro factors such as a low-interest rate environment, aggressive M&A for future DPU growth, wider roll out of the vaccination and recovery of global economic still support a potential bullish breakout. Despite tightened restrictions due to rising COVID-19 cases in Singapore which will affect the short term, global and local economic recovery is still expected in the long term.

Note: This above analysis is for my own personal research and it is NOT a buy or sell recommendation. Investors who would like to leverage my extensive research and years of Singapore REIT investing experience can approach me separately for a REIT Portfolio Consultation.

Kenny Loh is a Senior Consultant and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.  You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement

Continue Reading Singapore REIT Monthly Update (Oct 05 – 2021)