Singapore REITs has hit a 1-year low recently. The iEdge S-REIT Index, made up of 37 REITs listed on the SGX, was down 3% from a year ago, or 9% from its peak in Jul 2021.
The performance has not been bad if we compare it to the US or China equities. The key reason that is causing REIT prices to fall is the anticipation of the rise in interest rates.
REITs take loans in order to acquire capital intensive properties, just like individuals do. Higher interest rates mean that the financing cost is going to go up and that reduces the profits and dividends. With the pending rate hikes, it is logical that the REIT prices have to be adjusted downwards to incorporate the interest rate risk.
Hence, the current factors driving REIT prices (as with most other stocks) are not fundamentals but macro. In fact fundamentals have been improving – REITs have increased their dividends in 2021 as FTSE Straits Times REIT Index (another REIT index) reported a 16.5% dividend growth.
Yes, 2020 was a low base due to Covid and dividends have yet to recover to pre-Covid levels generally. But recovery there was.
Most investors buy REITs for the dividends and hence the key to evaluating REITs is in their ability to grow the dividends overtime or at least maintain it.
In this case it is about the ability of the REITs to continue giving undiminished dividends despite increase in interest rates.
Let’s see the impact of interest rate hikes to REIT’s dividend distribution, using Ascendas REIT as an example.
In their FY21 presentation, Ascendas REIT mentioned a 1% increase in interest rate would lower their distribution per unit (DPU) by 0.29c. That is just a 2% decline based on FY21 DPU of 15.258. Hardly an impact.
Here are some REITs’ dividend yields (14 Mar) and their 5y average yields
Capitaland Integrated Commercial Trust 5.3% vs 4.96%
Ascendas REIT 5.7% vs 4.25%
Mapletree Commercial Trust 5.1% vs 4.68%
Mapletree Logistics Trust 4.8% vs 4.72%
Mapletree Industrial Trust 5.2% vs 4.8%
The current yields are generally higher than the historical averages and that means that REITs are attractive buys now, especially the dividends aren’t going to be impacted much by rate hikes.
But one should not buy with an expectation of the price going up. It is more for the yields which is at a level you are happy with.
The above conclusion only applies if the inflation doesn’t worsen. If we have a runaway inflation problem, the interest rate will need to be raised much more than what is expected currently. That would cause REIT prices to go down further coupled with a bigger reduction in dividends.
