Singapore real estate investment trusts (S-REITs) are attractive for many reasons. They offer steady income through regular dividend payouts, are mandated to pay out at least 90% of their taxable income to shareholders, and many are well diversified with holdings not only in Singapore but also across Asia-Pacific, Europe and the U.S.
However, recent headlines may have taken some of the shine off this popular investment, which may be giving you pause. Here’s our take on what’s really going on with Singapore REITs.
A Few Quick Facts About S-REITs
In case you’re unfamiliar with the sector, here are a few quick facts to help set the proper context, drawn from REITAS, a non-profit sector representative.
Firstly, S-REITs is an important pillar of Singapore’s stock market, making up a hefty 12% by market cap. Not counting Japan, we have the largest REIT market in Asia, worth S$101 billion as at February this year.
Over the last 10 years, the S-REIT sector has grown at a compounded annual growth rate of 7%, putting Singapore well on the way to being a global REIT hub.
Given such facts, it is safe to say that S-REITs aren’t going away anytime soon, and the current doldrums are very likely to be temporary in nature.
How S-REITs Performed In The Past Year
Here’s the price chart of the iEdge S-REIT Index, which is used as a benchmark for the S-REIT sector on the whole.
As shown, the sector has taken some serious hits, quickly tumbling back down after an exuberant first quarter. At the time of writing, the index is hovering mere points above its 52-week low.
The reasons behind the poor performance of S-REITs include:
- The continued high interest rate environment, which REITs are susceptible to due to their highly leveraged nature. We could be seeing interest rate pressure starting to catch up to the sector.
- Stubbornly high inflation, which has dampened consumer spending. This has a direct impact on retail and hospitality, which are important pillars in S-REIT.
- Remote-working and hybrid work arrangements. With lesser people returning to the office, office rents are facing downward pressure as companies look to reduce overheads and rotate to other arrangements such as co-working spaces. This also has a knock-on effect on retail players that primarily serve office workers.
In other words, the current troubles plaguing S-REITs are largely cyclical. Once these macroeconomic weaknesses sort themselves out, the sector should similarly recover.
There’s reason to be optimistic. With the U.S. Fed pausing interest rate hikes for now, and even bets that rate cuts could be peeking over the horizon, investors may be in for a tailwind sooner than they’d think.
What’s the Outlook for S-REITs?
While things may be looking dismal on the index, remember that that is an overall view. Depending on the holdings you select, your own S-REIT portfolio may be telling a more hopeful story, especially if you’ve been diligent in picking out winners.
To aid you in that endeavour, here are some S-REIT highlights to consider.
Singapore, Asia-Pacific Office Sector Sees Resilience
The Asia-Pacific region is seeing higher return-to-office rates, compared to Europe and the U.S. Average office utilisation in Asia-PAcific stood at 65%, compared to 50% in the West.
Similar occupancy rates were seen in Singapore at 64%, with tech firms coming in at a strong 80%. This is a significant showing in light of current conditions, and office rents are expected to stay resilient and maintain their upward trend for the rest of the year.
Hospitality Trusts Buck Trend With Higher DPU
Hospitality trusts displayed signs of strength in H1 2023. A total of 10 S-REITs reported higher year-on-year net property income (NPI) for the half-year period ended on 30 June, 2023.
Of these, five hospitality trusts saw year-on-year improvements in distribution per unit (DPU) for the same half-year period, bucking the greater downward trend.
|Far East Hospitality Trust
|DPS: 1.92 cents (+24.7%)
|CDL Hospitality Trust
|DPS: 2.51 cents (+23%)
|CapitaLand Ascott Trust
|DPS: 2.78 cents (+19%)
|DPU: 7.29 cents (+3.3%)
|Keppel DC REIT
|+0.2% in distributable income
Related: 5 Best Performing REIT ETFs
Tips on Rebalancing Your Investment Portfolio
Of course, waiting things out is also a valid choice. If you’d rather rebalance your portfolio in light of the current state of S-REITs, here are two tips to consider.
Increase Allocation to Bonds
Like S-REITs, bonds also offer passive income through fixed coupon payments and redemption schedules. They also have less price volatility, which conservative investors may see as an advantage.
Thus, try increasing your allocation to bonds as a counterbalance to your property holdings, while gaining an additional source for passive income cash flow.
Switch to Robo-Advisors
If you don’t have the time or inclination to pick S-REITs on your own, (and having to stay on top of company announcements and earnings reports while doing so), consider investing in S-REITs with a robo-advisor.
In exchange for a small management fee, your holdings will be managed on your behalf, allowing you to reap the benefits of S-REITs and continue collecting passive income without experiencing high levels of stress and anxiety.
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