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Investing REITs Singapore Market

Tread Carefully If You’re Buying S-REITs Now Despite Attractive Prices

Calvin Lo

Singapore real estate investments trusts (REITs) continue to take a huge beating the past year and the decline has accelerated the past month. REITs have been selling off because it has become clearer that inflation is much stickier than earlier expected which means that interest rates will likely stay high and may even rise further.

The iEdge S-REIT Leaders Index has fallen 22% from its 52-week high hit on 3 Feb 2023. The index held pretty well above the 1,100 level until late Sep 2023, but after falling through that support level, has continued to free fall. The index is now close to pandemic lows back in Mar 2023 and decade lows around late 2015.

Higher financing costs

Higher interest rates are a bane to REITs, since all REITs utilise loans to fund property purchases. As interest rates on those loans increase (unless they are fixed rate loans), interest expense for REITs will increase thus eating into distributable income to shareholders. Even for REITs with fixed rate loans, typically these don’t last forever and have to be refinanced at higher rates eventually.

So if you’re looking to buy REITs, take a close look at its gearing ratio, which is the ratio of its total debts to its total assets. In Singapore, MAS set the regulatory limit as 45-50% (already raised previously due to COVID).

Lower distributions

In Singapore, when distributions take a hit, investors turn mob-like. On the practical side, retirees dependant on income from these distributions will see their lifestyles affected.

With such great focus on distributions, investors will likely sell REITs if distributions per unit (DPU) falls, causing prices to fall.

Higher for longer

With sticky inflation due to geopolitical tensions and a resilient US economy, interest rates are expected to stay higher for longer. The Fed has also supported this notion. Rate cuts anticipated (now seem like fat hopes) by the market have been pushed further and further out.

Though unlikely, there’s also a scenario where inflation reignites in a meaningful way and necessitates substantial interest rate increases. That would probably lead to another bout of heavy selling in most assets including REITs, bonds, and even equities. Needless to say, there’s plenty of risk despite the lower prices and attractive yields.

Attractive distribution yields

After the sharp declines, S-REITs are now trading at attractive distribution yields. The average yield of S-REITs is now at 7.7%, much higher than the average yield of the STI index. On an absolute basis, 7+% yield looks very attractive to me.

However, note that higher quality REITs typically pay lower distribution yields in exchange for relative safety vs lower quality REITs. According to the iEdge S-REIT Leaders Index factsheet, the latest 12-month dividend yield of the index is 6.15%.

That said, government bond yields have also increased and at a slightly faster rate. Despite the higher yields, the yield spread between S-REITs and 10-year SGS bonds of 303 bps is actually below the 10-year average of 383 bps. Consequently, we should continue to see pressure on S-REITs in the short term.

Read: S-REITs & Property Trusts Chartbook – October 2023

How to invest in S-REITs

The most straightforward way to invest in S-REITs is to buy shares directly from the Singapore Exchange (SGX) in board lots of 100 shares. However, buying individual REITs is not for the faint-hearted and requires thorough research into the REIT and its financials beforehand. Here’s a list of S-REITs from REITSWEEK.

Another way is to buy REIT exchange-traded funds (ETFs) listed on SGX. REIT ETFs include a basket of REITs, so you can get instant diversification by buying just one counter. Here’s a list of S-REIT ETFs from REITAS.

Alternatively, you can also consider Syfe REIT+ portfolio, which benchmarks against the iEdge S-REIT Leaders Index. See my review of Syfe REIT+ if you want to learn more. If you’re interested, you can sign up through my referral link.

Conclusion

Despite near decade-low prices for REITs offering a great opportunity to invest at high distribution yields, never ignore the risk for further downside. That’s why having a proper investment plan with an asset allocation plan and deployment strategy is so important.

For passive investors, there’s also always the dollar-cost-averaging (DCA) strategy, which you can execute through some robo-advisors or brokers like Syfe, FSMOne, etc.

Good luck with your investments!

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Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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