Reits’ Lacklustre Performance: A Glimmer of Hope for Singapore Property Owners
Singapore property owners have long been overshadowed by the stellar performance of the island’s banks. However, with the US Federal Reserve signaling the start of monetary easing from next month, the landlords’ day in the sun may not be far away.
Higher-for-Longer Global Interest Rates
Higher global interest rates have pumped up the profitability of loans at Singapore’s three homegrown banks. Last year, DBS, OCBC, and UOB distributed a combined S$11.3 billion in dividends, double the 2020 payout. This year, too, DBS has been generous in sharing the spoils of high net interest margins with investors. There hasn’t been much reason – yet – for the lenders to make aggressive provisions for loan losses.
Reits’ Lacklustre Performance
Contrast this bounty with the lacklustre performance of real estate investment trusts (Reits). The members of Singapore’s Reit index have together distributed between S$5 billion and S$5.5 billion annually to unitholders over the past three years, roughly S$1 billion more than what they were paying out as they were being hobbled by Covid-19. The elevated interest cost of the post-pandemic era has been a pain point.
A Glimmer of Hope
As interest rates begin to ease, the outlook for both profit and dividend distribution is going to change. Banks will most likely eke out a thinner margin on loans, and they’ll perhaps have to make higher provisions for soured corporate debt, even as Reits get a breather on their cost of financing. Lower expenses will mean more of the rental income flowing to investors. OCBC analysts expect the median Singapore Reit (S-Reit) tracked by them to pay 2.9% more per unit next financial year.
From Nursing Homes to Data Centers
From nursing homes in Japan to data centers in Ireland and Trader Joe’s grocery stores in the US, S-Reits give investors access to all sorts of rental streams. Even the landlords exposed to the worst segment of all – the US office market – are beginning to see a ray of hope.
Retail and Hospitality
In retail and hospitality, though, Singapore landlords may continue to find the local market more attractive, thanks to low unemployment and steady tourist arrivals. The government expects the economy to expand between 2 and 3% this year, in the upper range of its 1 to 3% forecast. Fresh leases at VivoCity, a local mall owned by Mapletree Pan Asia Commercial Trust, were signed last quarter at nearly a 20% premium over expiring agreements. At Festival Walk, a Hong Kong shopping venue owned by the same Reit, new leases fetched a 5% discount.
Conclusion
More often than not, Singapore property owners do well in the stock market when local long-term rates begin to slide from their peak, as OCBC’s research analyzing nine such episodes shows. In six of them, Reits have produced excess returns over the benchmark Straits Times Index. This time around, however, the yield on 10-year Singapore government notes has cooled from its October 2022 high. Yet, the Reits haven’t done much, while stocks, led by banks, have been shining bright. That could change. Once short-term US rates start moving lower, it will be time for banks to retreat – and for landlords to step out of their shadow.
Frequently Asked Questions
Q: What is the outlook for Singapore property owners?
A: With the US Federal Reserve signaling the start of monetary easing, the outlook for Singapore property owners is looking up.
Q: How have Reits performed in the past?
A: Reits have distributed between S$5 billion and S$5.5 billion annually to unitholders over the past three years, roughly S$1 billion more than what they were paying out as they were being hobbled by Covid-19.
Q: What is the outlook for Reits in the future?
A: As interest rates begin to ease, Reits are expected to benefit from lower expenses and higher rental income, leading to increased dividend distributions.
Q: What is the outlook for the Singapore economy?
A: The government expects the economy to expand between 2 and 3% this year, in the upper range of its 1 to 3% forecast.
