Are S-REITs Back On Track?
4 solid REITs to consider before the ease of interest rates.
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The global market is eagerly awaiting signals from the US Federal Reserve Board regarding the prospects of a rate cut in the Federal Funds Rate. However, Fed officials have been ambivalent and have not indicated any rate cut. In this article, we will explore the potential impact of interest rates on S-REITs (Singapore Real Estate Investment Trusts) and analyze the current market trends. Despite the tough and unfavourable environment in the past few years for REITs, we will highlight 4 resilient REITs that has been increasing their dividend per share for at least 3 consecutive years.
Impact of Interest Rates on S-REITs
In general, firmer interest rates tend to benefit banks, while softer rates benefit REITs. REITs rely on debt, particularly low-cost debt, to raise their yields. Debt is almost always cheaper than equity. The average distribution per unit (DPU) yield of S-REITs (excluding business and infrastructure trusts but including stapled securities) is approximately 7.6% on a historic basis and 6.7% based on current-year projections of DPU. For most Singapore-focused REITs, the average cost of debt remains below 4%.
Interest rates affect REITs in three main ways.
Firstly, unit prices are impacted through the yield spread, which is the difference between DPU yield and risk-free rates. The rising rate cycle has adversely affected unit prices, and to maintain the yield spread, unit prices of REITs have to drop unless DPU rises sufficiently to offset the spread.
Secondly, higher interest rates negatively affect DPU. The largest expense for S-REITs is interest expense. Even if the absolute level of debt does not rise during an interest rate hike cycle, the cost of that debt increases. Consequently, DPUs have been declining.
It is important to note that some specific REITs such as Manulife US REIT (MUST), Prime US REIT, and Keppel Pacific Oak US REIT (KORE). MUST and KORE have halted DPU until 2025 and later, while Prime has drastically cut its DPU. As a result, the office sector has witnessed the largest DPU declines, down 11% year-on-year, while the rest of the sectors recorded DPU declines of 2% to 4%.
4 REITs that grow DPUs
CapitaLand Integrated Commercial Trust (CICT):
CICT is Singapore's largest REIT, with a portfolio of 22 properties across Singapore, including prime office towers, shopping malls, and integrated developments. The REIT has proven its ability to navigate challenging market conditions, maintaining a healthy occupancy rate of over 95% on average. Its distribution per unit (DPU) has remained stable, and managed to increase its dividend payout in the last 3 years. CICT's diversified portfolio and prudent capital management have been key factors in its resilience.
Capitaland Ascott Trust (ART):
ART is a leading hospitality REIT, with a global portfolio of serviced residences and hotels. Despite the pandemic-induced disruptions in the hospitality sector, ART has demonstrated its adaptability. The REIT's occupancy rates have steadily recovered, reaching over 75% as of mid-2023. Moreover, ART's DPU grew by 19% year-on-year, highlighting its ability to generate consistent returns for investors.
Far East Hospitality Trust (FEHT):
FEHT is a unique hospitality REIT, focusing on Singapore's domestic tourism market. The REIT's portfolio of hotels and serviced residences has proven resilient, with occupancy rates hovering around 80% as of August 2023. FEHT's DPU has maintained a 3-year average growth of 5%, demonstrating its capacity to adapt to changing market dynamics and capitalize on the recovering domestic travel demand.
Parkway Life REIT (PLife REIT):
PLife REIT is a specialist healthcare REIT, with a portfolio of hospitals, nursing homes, and medical properties primarily located in Singapore. The REIT's focus on the healthcare sector has contributed to its resilience, as the demand for healthcare services has remained relatively stable during the pandemic. PLife REIT's occupancy rates have consistently exceeded 95%, and its DPU has delivered a 3-year average growth of 2.7%.
Conclusion
The impact of interest rates on S-REITs is significant and cannot be ignored. As interest rates rise, unit prices of REITs tend to drop, negatively affecting investor returns. Additionally, higher interest rates increase the cost of debt for REITs, putting pressure on their financial performance. However, it is important to note that the impact of interest rates on S-REITs varies across different sectors and individual REITs. Investors should carefully analyze the specific dynamics of each REIT and consider their risk appetite before making investment decisions.
While the current market trends suggest a challenging environment for S-REITs in the short term, there are opportunities for recovery in the long term. As the global economy stabilizes and interest rates reach a plateau, investor sentiment is likely to improve, leading to a potential rebound in S-REIT prices. It is crucial for investors to stay informed about the latest developments in interest rates and monitor the financial performance of individual REITs to make informed investment decisions.
In conclusion, the impact of interest rates on S-REITs cannot be underestimated. It is crucial for investors to understand the dynamics of interest rates and their implications for the S-REIT sector. By staying informed and conducting thorough analysis, investors can navigate the challenges and identify opportunities for long-term growth in the S-REIT market.
Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any form. Please do your own research and seek advice from a qualified financial advisor. From time to time, I have positions in all or some of the mentioned stocks when publishing this article. This is a disclosure - not a recommendation to buy or sell stocks.