Find my interview as one of the panelists in insideINVEST.
- Kenny Loh (Senior Consultant of an Independent Financial Adviser)
- Chan Kum Kong (Head of Research and Product, SGX)
- Nupur Joshi (CEO, REITAS)
With growing interest in REITs and retail investors hunt for higher yields amidst the uncertainties in the macro environment, hear what our panel of experts have to say about S-REITs.
S-REITs have performed well over the past 10 years. What are your views of this asset class moving forward?
Kenny: The FTSE ST REIT Index, which represents the Singapore REIT sector, has gone up by 114% in 10 years and translates to a compounded annual growth rate (CAGR) of 8.8% excluding dividend yield. The worst correction from the peak is about 22% during this 10-year period.
Moving forward, S-REITs are expected to grow in market capitalisation and continue to offer investors attractive returns. However, investors must be cautious as this sector is currently getting close to a 10-year historical high. As long as they continue to grow in distribution per unit (DPU) and interest rates maintain or reduce from current level, there is a high possibility that S-REITs can break the historical high and move northwards.
Kum Kong: Most sectors have performed well over the past 10 years through to the end of 2018, exemplified by the Straits Times Index’s annualised total return of 9.2%. For a more recent perspective referencing the last three years and comparing against the performance of the biggest Singapore-focused developers, construction stocks to S-REITs, they are clearly more defensive in their total returns in each of the years. While Ascendas REIT, CapitaLand Mall Trust, CapitaLand Commercial Trust, Mapletree Commercial Trust and Suntec REIT averaged only two-thirds of the strong 45%+ average gains by their developer and construction counterparts in 2017, these five REITs averaged a marginal gain in 2018, compared to 20% average declines for their counterparts in real estate development and construction.
Apart from being a defensive alternative in recent years, REITs’ average yields are currently more than double of 10-year government bond yields. In addition, REIT ETFs have enhanced investor access to the sector, and we now have three REITs in the STI, with all five STI Reserve Stocks represented by REITs!
Nupur: S-REIT is one of the most active sectors on the Singapore Exchange. Over the last 5 years (2013-2018), the FTSE ST REIT Index has delivered total returns of 38%. The number of REITs and property trusts has grown to 42 with a total market capitalization of around S$90 billion.
One of the notable trends currently for REITs is expansion into overseas markets to seek acquisition opportunities for growth. This is mainly because Singapore is small and most good quality properties here are already securitized. Over 75% of REITs and property trusts now have properties outside of Singapore compared to 65% five years ago. In fact, there are now only 8 pure-play REITs.
The other related trend is the listing of REITs with foreign sponsors and foreign assets. Prudent regulatory framework, supportive tax policies and a strong currency are some of the factors attracting foreign REIT listings. As more foreign REITs list here, and with our existing REITs acquiring more and more properties overseas, Singapore is solidifying its position as a global REIT hub. Finally, one trend that we are likely to see moving forward is the introduction of new asset classes (e.g. student accommodation, multi-family housing etc).
How can a REIT maintain growth in a fast-changing landscape?
Kenny: REIT managers have to constantly monitor the changing economic landscape and how these changes affect the utilisation of their current portfolios. They must also anticipate the impending impacts and plan ahead to diversify into different types of properties.
Beyond the business model of purely leasing the property to collect rental, they can also create an eco-system to increase rentability, add value to the tenants’ businesses and create stickiness. I am already seeing the integration of hotels and meetings, incentives, conventions and exhibitions (MICE) in one of the hospitality REITs, instead of relying solely on traditional hotel accommodations. Another example of ecosystem would be Healthcare-Tourism-Mall and e-Commerce-Logistic-Shipping Port.
Personally, I hope to see a student accommodation REIT listed on the Singapore Exchange. It will be very interesting if one day the hostels and staff apartments in NUS and NTU can be structured as REITs.
China and Southeast Asia are pretty much untapped areas. We can leverage on our existing experience and knowledge to expand into these untapped opportunities.
Kum Kong: Expansion is one way to maintain growth. In fact, the S-REITs sector has been expanding, with multiple examples of SGX-listed REITs in the region and further abroad. For instance, Cache Logistics Trust, listed on SGX nine years ago with just six logistics warehouses in Singapore, has expanded into Australia by acquiring 16 warehouses in the last four years. This REIT currently has a total of 26 logistics warehouses in its portfolio and is looking for opportunities in South Korea and China. Manulife US REIT has acquired three office buildings in late 2017 and 2018 – Exchange in New Jersey, Penn in Washington DC and Phipps in Atlanta – which lifted its net property income by 38.4% and DPU by 7.7%, for the fourth quarter ended 31 December 2018. This brings its total portfolio to seven office properties in the US, with an aggregate net lettable area of 3.7 million square feet, as at the end of 2018.
Nupur: The environment for REITs is becoming increasingly competitive. There is fierce competition to acquire properties with the key competitors being private real estate funds, sovereign wealth funds, developers, REITs in other markets etc. With that, REIT managers have to look harder – at new geographies and possibly even new asset classes where growth potential is higher or competition is less fierce. In fact, we have seen several S-REITs buying properties in Europe and the US in the past months. Having said that, entering into a new market or geography is not easy as REIT managers need to do a thorough analysis and fully understand the market dynamics before acquiring a property or a portfolio of properties.
Besides acquisitions, redevelopment is another option available to REIT managers. Recently, asset recycling has become more popular, that is, selling assets that may have limited growth prospects in the hands of the REIT but meet the requirements of other owners.
More importantly, REIT managers have to constantly review their portfolio and ensure that they are deriving the most value out of it, either via asset enhancements, redevelopment or simply lease structuring.
How do you see the disruptive opportunities in the REITs sector?
Kenny: Co-sharing work spaces, Big Data, and cloud servers enable people to work any time, any place. They do not need a fixed office location. As for the financial services industry, client meetings can be conducted at any place with the use of RoboAdvisor, e-Financial Compass and Fintech applications, and consumers can use ATMs and mobile devices to do banking transactions. All these disruptions will have an impact on the demand for commercial offices.
As Singapore goes through economic restructuring, lower value-added manufacturing would be phased out eventually. Affected REIT managers have may consider restructuring their portfolios to high- specification factories or even convert factory usage to hydro-farming, etc.
With the expansive use of artificial intelligence, Big Data and robotic automation which require huge amounts of data and computer processing power, demand for data centers will definitely grow in the long term. I expect many more data centers to be included in S-REITs in the very near future.
Kum Kong: The S-REIT sector includes REITs with a focus on high technology and e-commerce related properties. Some examples include Keppel DC REIT, the first data centre REIT listed in Asia, investing in a diversified portfolio of income-producing real estate assets used primarily for data centre purposes, located in Singapore, Malaysia, Australia, Germany, Ireland, the Netherlands, UK and Italy. Mapletree Industrial Trust also owns 14 data centres in the US (through its 40% interest in a joint venture with Mapletree Investments Pte Ltd). EC World REIT has a portfolio of 7 properties used primarily for e-commerce, supply-chain management and logistics purposes in Hangzhou and Wuhan, China, which enables the Reit to ride the wave of rapidly expanding e-commerce retail sales in the country. China, which accounted for 43% of global e-commerce sales in 2015, is expected to grow to nearly 60% by 2020, according to data from E-marketer.
Nupur: Disruption is both a threat and an opportunity. REIT managers must assess which disruptions they believe are transient and which are here to stay. No asset class is shielded from the rapidly changing market place. For example, co-working space is a big disruptor in the office segment and many office REITs are increasing their exposure to co-working operators. In the industrial sector, conventional factory spaces are being disrupted by higher value-added manufacturing facilities. In logistics and retail, e-commerce is a major disruptor and we can see REITs aligning their business model to meet the changing needs of customers. Integrating physical (offline) retail with online shopping has been one of the ways retail REITs are adapting. The key message is that REIT managers need to have their ears on the ground and be constantly aware of how things are changing, and then be nimble and astute to take advantage of these trends.
When evaluating a REIT, what are your key metrics?
Kenny: At the macro level, I monitor the yield spread of S-REITs and 10-year government bond yields, monetary policies and technical analysis of the REIT index.
At the micro level, I use 4 key metrics – distribution yield, Price/NAV valuation, gearing ratio and historical DPU trend to analyse individual REITs. These are the key metrics I use to screen and shortlist the REITs. In addition, I also conduct risk assessments on the sustainability of the dividend payout before I pull the buy trigger.
Kum Kong: Popular key metrics include portfolio occupancy levels and Weighted Average Lease Expiry (WALEs) which are indicators of the REIT’s long-term cashflow and earnings stability. These metrics are based on tenant base and leasing agreements.
Other key metrics include the percentage of fixed rate debt versus floating rate debt, weighted average debt maturity (in years) and aggregate leverage ratio (maximum gearing ratio of 45% as mandated by MAS). These are also indicators of the REIT’s financial health in a rising interest-rate environment, in addition to an indication of income available for distribution and DPU growth over the years. In a recent kopi-C report and Business Times article, Daniel Cerf, CEO of the manager of Mainboard-listed Cache Logistics Trust highlighted that “REITs in general are really for annuity investors”.
Nupur: Sometimes, investors tend to look at the dividend yield as the key factor determining which REIT to invest in. While yield is important, one must first understand where the yield is coming from and the stability of that yield moving forward. In order to understand that, investors should study the track record of the REIT, its property portfolio, capital management strategy, growth strategy and the strength of its sponsor.
For example, investors need to understand the quality of the REIT’s assets and take time to study the demand-supply dynamics of the asset class in the key geographies that REIT has properties in. Other useful metrics are Weighted Average Lease Expiry, lease expiry profile, top 10 tenants etc.
On the capital management front, metrics such as gearing ratio, debt expiry profile, percentage of distributions that are hedged (for REITs with overseas properties) are important indicators.
At the end of the day, investing in REITs is no different from investing in other asset classes – the quality of the portfolio, picking the most able of managers and buying at the right prices.
What is your favorite sector within REITs?
Kenny: I love all the sectors due to the different ways of generating returns for my portfolio.
My favorite REITs sectors are healthcare, retail malls and data centers. I like the defensiveness of these sectors and I use them as my core portfolio.
My satellite portfolio would be in the industrial, commercial offices and hospitality sectors as I seek to optimise my portfolio returns with capital gains due to their cyclical nature.
Kum Kong: There is a strong element of diversification across the REITs sector, in terms of property asset types and geographies. Investors have a lot of choices when it comes to choosing their most favored REIT investment.
Property assets of SGX-listed REITs span retail, office, industrial/logistics, healthcare facilities (hospitals/nursing homes), serviced residences, hotels, and data centres. Examples include retail shopping malls in various cities in China, Australia, Singapore, Indonesia and Malaysia; office/commercial properties in Singapore, Malaysia, Australia, Japan, United States, Germany, Italy, Amsterdam and France; industrial parks in Singapore and India; hospitals in Malaysia, Singapore and Indonesia and nursing homes in Japan.
Nupur: As a REITs association, we would like to see all S-REITs do well and thrive. Market conditions inevitably change, but the distinctive aspect of REITs is that a well-managed REIT should be able to give relatively stable distributions through different business and property cycles.
I will be sharing at REITs Symposium on May 18, 2019 at Sands Expo and Convention Centre,
Marina Bay Sands, Level 4 (Roselle Simpor Ballroom).
Catch me in person
- Panel Discussion #1 – REITs: Still a Viable Investment? (2:10pm to 2:40pm)
- REITs 101
- REITs vs Physical Properties (10:15am -10:30am)
- Metrics to Evaluate a REIT Part 1 – Yield (12:00pm -12:15pm)
- Metrics to Evaluate a REIT Part 2 – Price/NAV (1:15pm -1:30pm)
- Metrics to Evaluate a REIT Part 3 – Gearing Ratio (2:45pm -3:00pm)
- Building a Diversified REIT Portfolio (4:00pm -4:15pm)
First 30 signups via promo code (msinvesting) will be entitled to a mystery gift and it’s redeemable on ground at ShareInvestor’s booth. Click the REITs Symposium here to register. http://www.reitsymposium.com/index.html
Take note that registration will be closed on May 14, 2019.