Singapore is one of Asia’s largest REIT and property trust market with around 43 S-REITs listed on the Singapore Stock Exchange, with a market capitalisation of over S$110 billion.
S-REITs are an important segment in the Singapore stock market, with 5 REITs included in the Straits Times Index, with a total weight of 7.6%.
Today, we explore what REITs investors can expect in 2022.
S-REITs performance in 2021
As seen in Chart 1 below, REIT indices such as FTSE ST REIT Index and iEdge S-REIT Index had underperformed most regional REIT indices in 2021, including the Asia Pacific Equity and of course, the American indices.
However, the REIT indices were not bottom of their class as they had outperformed the Hong Kong and Chinese indices.
Source: SGX
Looking at Chart 2 below, we can see that out of 40 REITs, about 11 recorded negative returns while another 10 recorded returns of less than 10%.
In other words, slightly more than half of the REIT population underperformed the two REIT indices.
Source: SGX
S-REITs Outlook for 2022
Macroeconomic and interest rate environment
The current economic expectation for 2022 is lukewarm, with varied economic recovery across the world. As seen in Chart 3 below, the consensus is for the global 2022 economic growth to slow down as compared to this year. This is mainly due to risks such as COVID lockdowns, inflation, supply chain disruption and tightened labour market conditions.
Inflation pressures have also pushed central banks to carry out monetary tightening in countries and economic blocs in the US, UK and EU. The UK has already hiked rates once in 2021 and it is almost certain that the US will hike rates in 2022. The EU has also began to roll back monetary stimulus.
Similarly, in Singapore, the Ministry of Trade and Industry has forecasted that 2021 will have a full year growth of around 7%, while 2022 will have a growth between 3% to 5%.
REITs outlook
The 2022 market is expected to continue to be robust, with rental prices holding up or recovering across all subsegments such as Office, Retail, Industrial, Logistics and Hospitality.
The common consensus is to be relatively cautious of REITs due to the rising interest rates and tightening liquidity environment. However, depending on the pace of tightening, REITs may find themselves in a favourable environment in 1H22 and will likely to continue acquiring assets and growing returns for investors.
Some subsegments such as hospitality, retail and logistic REITS may outperform in 2022.
Hospitality and Retail REITs will receive support from Singapore’s reopening, and logistics REITs might continue to benefit from secular trends. The Tech industry will continue to be a pillar of strength for the leasing industry in 2022 after significant leasing of space in 2021.
Source: Knight Frank
Specialised REIT assets such as data centres and healthcare are also expected to perform well with student housing poised for a revival, as education institutions start opening to international students again.
REITs Valuations
The data in Chart 5 below indicates that we could see a correction for REITs in the near future.
The yield spread is lower than the 10 year average and this may compress further as interest rates increase, causing a pullback in share prices for REITs.
The FTSE ST REIT Index is also trading slightly above its long-term P/B ratio and the dividend yield is at its all-time low.
On the other hand, this could be seen as the new normal due to the quality of REITs in Singapore and the strength of certain subsegments, such as Logistics and Industrial REITs, benefiting from long-term structural tailwinds.
Conclusion
While the REIT index underperformed the STI in 2021, Chart 6 shows that on a longer timeframe, the REIT index has outperformed the STI. It will be interesting to see if the REIT index can get its momentum back and continue to outperform the STI in 2022.
Source: SGX
The macroeconomic outlook for 2022 is also less favourable than 2021. However, we could see recovery in certain subsegments such as Hospitality and Retail, as well as continued growth from structural tailwinds for the Logistics subsegment.
Depending on the pace of monetary and fiscal tightening, REITs may find themselves able to carry out acquisitions should the opportunity arise.
Valuations seem to be slightly elevated as compared to historical ratios, but it could be due to a structural shift in quality of the REITs listed in Singapore, as investors are willing to trade these high quality REITs at higher valuations. Elevated valuation is also always an indicator of a potential correction ahead.
On an overall basis, with more than 40 REITs in a mix of subsegments listed in Singapore and investors expectations on newly listed REITs such as Daiwa House Logistics Trust (SGX:DHLU) and Digital Core REIT (SGX:DCRU) to demonstrate its mettle, it seems there is a lot to look forward to in 2022.
If you aspire to build a sustainable income from a REITs portfolio, join Chris Ng at his live webinar to learn how you can get started and what you should note when building a resilient REIT portfolio.