Singapore REITs have not performed well in the last 12 months and the decline has accelerated in recent weeks. The broad based FTSE ST REIT index has fallen by nearly 10% in the last 1 week or so.
In the same timeframe, some of the larger and more well regarded REITs such as Ascendas REIT and Mapletree Logistics Trust have declined by mid-single digit percentages while others such as Daiwa House Logistics Trust, Prime US Reit and ESR-Logos REIT have see declines of low double digit percentages.
We have identified the following 6 reasons why SREITS crashed and will be diving into the details here:
- Higher interest rates environment
- Weak economic conditions stems growth
- Difficult to carry out accretive acquisitions
- REITs are either in a holding or divestment cycle
- Organic growth and asset enhancement initiatives takes time
- Weakening of foreign currencies
1) Higher interest rates environment
We are in a rising interest rate environment. The Singapore 10 year bond yield is currently hovering near 3.5% and is at a 5 year (and also 10 year) high.
On 21 September 2022, the US Fed raised interest rates by 0.75% to 3% and guided for another 1.25% of interest rate hikes by the end of this year. The US 10 year bond yield is nearly at 4% while the US 2 year bond yield is at 4.3%.
REITs have a debt structure to fund the purchase of its properties and a higher interest rate environment means that REITs have seen their interest costs spiked up.
If we remain in a high interest rate environment for a long period, even the REITs with hedges and fixed interest costs would eventually have to refinance at the prevailing high interest rates.
2) Weak economic conditions
Due to the weak economic conditions and the uncertainty over the post-pandemic rental dynamics, rental prices and occupancy remain lackluster in many countries.
To make the situation worse, property costs such as manpower, utilities, repair and maintenance are increasing due to inflation. Interest costs are also increasing.
A weak topline and pressures on the bottom-line will squeeze the REITs’ income statements from both ends.
3) Difficult to carry out accretive acquisitions
Although it is possible to carry out accretive acquisitions with the right opportunity, the current environment makes it very difficult to do so. This is why there has been very few acquisitions in 2022, especially in recent months.
The two main reasons are as follows:
- low share price makes NAV accretive acquisitions difficult as REITs may have to issue dilutive units.
- low yield from properties make earnings accretive acquisitions difficult
4) REITs are either in a holding or divestment cycle
In 2020 and 2021 when interest rates were low, many REITs carried out multiple acquisitions and funded them by equity fund raising and some levels of debt. This means that many of these REITs are tapped out, with higher debt and investors who have already supported recent equity fund raisings.
Many of these REITs are now either focusing on organically improving its newly acquired assets or looking to diversify to reduce its gearing and ready itself for the next acquisition opportunity.
5) Organic growth and asset enhancement initiatives takes time
For a REIT, there are not many ways to carry out organic growth.
On the top line, the REIT can try to lease out all its space and at higher rental prices than previously contracted. This is difficult as economic conditions are weak.
On the bottom line, a REIT can better manage its operational costs and interest costs. Once again, it is difficult as we are in a high inflation and high interest rate environment.
The last option on the table is to carry out asset enhancement initiatives (AEIs). This takes time but it is one of the ways that REIT managers value add to investors. Examples of AEIs for a retail REIT including renovating a space vacated by a large tenant and backfilling it with new and in trend tenants to improve the overall offerings.
A logistics or industrial REIT can upgrade its facilities to provide modern technology and attract customers with higher specifications such as pharmaceuticals or ecommerce companies. A hospitality REIT can refurbish its hotels and then charge higher RevPAR.
What is key to note is that when AEIs are being carried out, revenue contribution from that property will be limited. Depending on the scale of the AEI, it can take anywhere from months to even a year or two. In the meantime, the limited revenue contribution will be an overhang on the REIT’s bottomline.
6) Weakening of foreign currencies
Of the 40+ SREITs listed in Singapore, there are only a handful of REITs that are not geographically diversified. Most SREITs have a certain level of geographical diversification due to the limited opportunities in Singapore.
Due to the strong US dollar, the Singapore dollar has strengthened against many of the currencies where many of our SREITs have exposure to, such as the Euro dollar, British pound, Australian dollar and Japanese Yen.
In some cases, the foreign currency has depreciated more than 10% and for REITs that have significant exposure to these currencies and not hedged their foreign income, this will have a major impact on the distribution.
Why are S-REITs crashing…and should you buy?
We shared 6 reasons why SREITS crashed. Reasons such as a higher interest rate environment and a weak economic condition are overhangs which may not go away in the short term and this will make it difficult to grow via accretive acquisitions.
Due to the past acquisitions and strong performance by REITs, many REITs are now in a holding or divestment cycle which means that their overall distribution may decline.
This is the time where many REITs will look inwards and focus on organic growth and asset enhancement initiatives, but these strategies will take time to execute before it can bear fruit for the REIT.
Investors who are keen on REITs whether as dividend investors or are tempted by potential capital gains should take note of the current dynamics at play before making any investing decision. Some of the reasons mentioned here may take a while to be resolved or mitigated and investors should avoid taking a short term view.
Alvin also shared his thoughts:
