I was keeping abreast of the Singapore REIT sector to prepare myself as a panellist at the REIT Symposium 2020. I thought I could summarise some of the developments into an article to benefit more people.
FTSE REIT Index Price-to-Book Ratio suggests REITs are fairly priced
Here’s the Price-to-Book Ratio range for the FTSE REIT Index:
The plot is closer to the upper half of the range, suggesting that the REITs aren’t that cheap after all.
The sharp decline early this year was a great opportunity as REITs had been the cheapest in the past decade. The rebound was also swift and now REITs are not cheap per se.
That said, using the average can be misleading as there are bound to be REITs that are cheap while others can be overvalued.
REIT Metrics by Sectors
Here’s a summary of the various REIT sectors’ dividend yields, gearing and P/B ratios.
| Current Yield | Forward Yield | YTD Return (14 Sep 2020) | Gearing | P/B Ratio | |
| Office | 7.1% | 7.4% | -13.8% | 37% | 0.9 |
| Retail | 6.5% | 8.5% | -20.7% | 35% | 0.8 |
| Industrial | 6.3% | 6.7% | +0.7% | 38% | 1.2 |
| Hospitality | 4.2% | 6.4% | -36% | 38% | 0.6 |
| Healthcare | 7.4% | 11.3% | -16% | 37% | 1.2 |
Hospitality REITs
Hospitality has the worst stock performance (-36%) and it isn’t surprising given that tourism is dead. The dividend yield is also the lowest for this sector since there isn’t much income from vacant hotels.
The PB ratio of 0.6 also suggests hospitality REITs are the cheapest of the lot and investors who have strong holding power and patience may find these as good turnaround candidates.
Industrial REITs
They are the most resilient lot. Industrial REITs are currently trading at PB ratio of 1.2 and the only sector to deliver a positive stock return of 0.7%.
Logistics and supply chains are still crucial during a lockdown especially for food and daily necessities.
Retail and Office REITs
Retail REITs are relatively cheaper than Office REITs, if we compare their PB ratios (0.8 vs 0.9).
Both have not recovered in terms of stock prices and are still down for the year in double digit percentages.
Healthcare REITs
Healthcare is the most surprising under-performer, considering that Covid-19 is a health crisis and we would expect hospitals to do well.
The reality is that non-emergency consultations and surgeries have been postponed. Medical tourism was also impacted since patients aren’t able to travel. This hurt many of the private clinics in Singapore.
What’s ahead for REITs?
Analysts have been positive that better days are ahead as they projected higher forward yields for the REITs. They are most positive on Retail, Hospitality and Healthcare.
The gearing ratios have been below 40% and the Monetary Authority of Singapore has increased the debt limit from 45% to 50%. This would give the REITs more debt room and the low interest rate is favorable for borrowing.
Acquisitions
Some REITs have announced acquisitions recently. I always believe that expanding during bad times is often a good strategy because things are cheaper.
Mapletree Industrial Trust (SGX:ME8U) is acquiring a data centre and office located in Virginia, US for up to US$266.9 million. Previously I wrote that Mapletree Industrial REIT is a data centre REIT in the making. The management has been quick to add more data centres and it now accounts for 34.7% its portfolio by AUM. I believe more data centre acquisitions would materialise in the future.
Frasers Centrepoint Trust (SGX:J69U) is acquiring the remaining 63.1% in PGIM Asia Retail Fund (ARF). It will add Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1 and Central Plaza to its portfolio while divesting Bedok Mall. The Trust is raising $1.3 billion via a placement and preferential equity fund raising to pay for the acquisition. I am bullish about Frasers Centrepoint Trust and I shared my views here. Disclosure: I am invested.
Lippo Malls Indonesia Retail Trust (SGX:D5IU) is acquiring Puri Mall for $330.2 million. This is a huge acquisition considering that the market capitalisation of LMIRT is only around $330.73m! Only time will tell if this bold move is right.
Mergers
There’s also a trend of REITs merging to form bigger REITs. The benefits include getting more recognition and inclusion into indices, which could attract even more institutional investors. They may also get better credit ratings and bring down their cost of debt.
Here are the ongoing mergers:
Capitaland Malls Trust (SGX:C38U) has received SGX’s in-principle approval to list up to 2.78 billion new units to fund part of its merger with Capitaland Commercial Trust (SGX:C61U). The EGM will be held on 29 Sep 2020 and the deal’s deadline has been extended to 30 Nov 2020.
Sabana REIT (SGX:M1GU) has produced enough drama to be made into a TV series. After the previous CEO resigned under unitholders’ pressure, the pending merger with ESR-REIT (SGX:J91U) dealt another blow for the investors. I explained that the deal is a bad one for Sabana REIT unitholders because the offer was a 26% discount to its Net Asset Value. Quarz and Black Crane have openly voiced their unhappiness of the deal and vowed to vote against the merger. The management of both REITs are, of course, unwilling to budge and revise the offer. The drama continues.
Are REITs safe to invest now?
In hindsight, the best time to buy REITs was during Mar-Apr 2020, when the fear and the uncertainty were the greatest. But we cannot rewind time and we always have to make a decision without knowing what’s going to happen tomorrow.
If you are buying REITs periodically, like a dollar cost averaging plan, you should just keep buying regardless if the market is up or down. Timing the market might make it worse. Anyway, you are probably not going to sell anytime soon and REITs have a higher chance of growing their value and share prices in the long run than in the short term. So, just accumulate your holdings overtime and it would snowball into meaningful wealth.
If you are buying in big lump sums, it would be better to buy when the market corrects. This is especially true for those who go for higher quality REITs or those with a growth story like Keppel DC REIT. They tend to be trading at a premium relative to the rest of the REITs most of the time, and waiting for better prices would be a more prudent approach.
However, even at this point in time, there are cheaper sectors such as hospitality. Of course, investing there would come with greater risks and we aren’t sure when tourism would be back. Office and malls don’t look expensive either.
If you are investing for income, you have to expect lower yields in the short term as many REITs are taking in less income. I believe it is a temporary impact and that it should get better in the future. You have to endure a period of lower payouts to enjoy higher streams of income in the future.
Hence, the answer to the question whether to buy REITs now really depends on your personal objectives, investing styles, time horizon and risk tolerance.
Want more? Zhi Rong shared his take on the sREIT markets in 2021 here