S-REITs took a beating over the last couple of years when interest rates were high, as they were impacted by a trifecta of slowing growth, higher interest expenses and lower valuations. Since then, we have identified 19 S-REITs that have gained more than 10% in just one month, with some rising over 25%, indicating that S-REITs may already be pricing in upcoming rate cuts.
Here we look at whether it’s too late to invest in S-REITs and which ones could be the better buy. There is also a question as to whether S-REITs could be a longer term holding investment or whether it would just be a mere quick and speculative play.
| Name | Ticker (SGX) | Market Cap | 1 Month Price Total Return |
| Manulife US Real Estate Investment Trust | BTOU | 178 | 35% |
| Keppel Pacific Oak US REIT | CMOU | 261 | 25% |
| CapitaLand China Trust | AU8U | 1,261 | 17% |
| Mapletree Pan Asia Commercial Trust | N2IU | 7,418 | 15% |
| Cromwell European Real Estate Investment Trust | CWBU | 860 | 14% |
| Frasers Logistics & Commercial Trust | BUOU | 4,246 | 13% |
| Lendlease Global Commercial REIT | JYEU | 1,438 | 13% |
| Cromwell European Real Estate Investment Trust | CWCU | 1,243 | 11% |
| Lippo Malls Indonesia Retail Trust | D5IU | 154 | 11% |
| Keppel REIT | K71U | 3,545 | 11% |
| Mapletree Industrial Trust | ME8U | 7,034 | 11% |
| First Real Estate Investment Trust | AW9U | 554 | 10% |
| Mapletree Logistics Trust | M44U | 7,047 | 10% |
| Prime US REIT | OXMU | 241 | 10% |
| CapitaLand Ascendas REIT | A17U | 12,795 | 10% |
| ESR-LOGOS REIT | J91U | 2,152 | 10% |
| Parkway Life Real Estate Investment Trust | C2PU | 2,335 | 10% |
| United Hampshire US Real Estate Investment Trust | ODBU | 260 | 10% |
| Elite UK REIT | MXNU | 161 | 10% |
Is it too late to buy?
Not at all. Aside from the top performers, most other REITs on the list have recorded gains in the low teens percentages.
However, looking at the 1-year performance of the REIT index, we can see that the 1 year performance is a meagre +4% while the YTD performance is actually still down at -3%.
To us, this means that the REIT sector is merely playing catch-up as a laggards, especially when compared to the broader STI, which is up 9% YTD and 10% over the past year.
Furthermore, when looking at the 5-year performance, the REIT index is down 38% for the period, which indicates that there could be much more upside potential.
Which S-REITs are a better buy for long term investments?
After more than a decade of track record, S-REITs that have succeeded over the longer term share the following key characteristics. The more boxes they tick, the more likely they are to succeed. While the past is not always indicative of the future, these characteristics do hold relevance.
A strong sponsor and REIT management team play a significant part, but the focus should be on their numerical track record. DPU growth, whether arising from organic rental reversion or accretive acquisitions, is the most important factor.
To consistently achieve DPU growth, a REIT management must score on all counts – capital allocation, capital management, asset management, and more.
In recent years, some blue chip S-REITs that previously ticked most boxes, such as Mapletree Pan Asia Commercial, have underperformed. This is due to parts of their portfolio being located in geographic regions that are underperforming or in asset classes facing secular headwinds.
The usual suspects for the best S-REIT buys, ticking most if not all boxes, would be Parkway Life, as well as many of the Mapletree and CapitaLand REITs.
Speculative plays
Volatility is both a trader’s best friend and also his worst enemy. Looking at the list, those S-REITs that have risen the most are those most deeply affected by rate hikes (as well as other factors) and are therefore likely to benefit more when rates are cut.
A smaller market cap is representative of a smaller REIT, which tends to exhibits more volatility as compared to blue chip REITs.
Some of the smaller cap REITs also exhibit various risk indicators, such as higher gearing and lower interest coverage ratio. Many of them continue to face fundamental risks stemming from the fallout from the pandemic and the change in trends. Smaller cap REITs also tend to face a bigger impact when the economy slow down as their assets may be located in less prime location and face competition from better assets.
Cromwell European Real Estate Investment Trust and ESR-LOGOS REIT are two REITs that can be viewed as shorter term speculative plays, as investors lean towards smaller logistics/industrial plays. These REITS have shown some resilience, with low-teens to high single-digits DPU decline in recent years, and may be an outsized beneficiary of any potential tailwinds.
Don’t be too late
Regardless of whether you choose to invest for the longer term or just want to make a short term play, the key is to take action before it’s too late.
The FOMC will hold its next meeting on 18 September 2024, and it is highly likely that the first rate will commence then.
While the rate cut trajectory is still uncertain, some market watchers have warned that if the Fed does not cut rates fast enough, the Fed may be too late to prevent a recession. If the Fed cut rates fast enough, the S-REITs will transition from a trifecta of problems to a trifecta of growth where they would see higher revenue, lower interest expenses and higher valuations. This would also allow them to carry out acquisitions to further boost DPU growth.
Of course, some REITs may have seen their fundamentals permanently deteriorate and may not reach their previous highs, but upside potential still remains.
Join us for our next webinar session to find out how we identify and select REITs for higher and sustainable yields.
