The REIT market in Singapore has matured and there are many options for investors. Despite being based in Singapore, investors can invest in overseas properties via REITs.
However, my observation is that overseas REITs tend to underperform. To verify this observation, I conducted research, and in this post, I will be sharing my findings with you.
For those who prefer a video format, I’ve summarised my findings here:
Defining overseas REITs
Differentiating between Singapore REITs and overseas REITs can be challenging when they have properties in both locations.
To address this, for the purposes of this comparison, I will define a Singapore REIT as having more than 50% of its properties located in Singapore. Conversely, an overseas REIT will be defined as having less than 50% of its properties located in Singapore.
It’s important to consider both capital gains and dividend gains. Since most REITs distribute a significant portion of their earnings as dividends, the total dividend gains should be factored in when comparing different REITs.
5-year Performances
In the following table, you can see the REITs that I have gathered for performance comparison over the past five years. REITs with less than five years of performance history will be excluded from this comparison.
Therefore, only REITs with the full five years of performance data will be considered.
The overall performance of Singapore REITs has been quite impressive, with positive returns achieved by a majority of them over the past five years.
These REITs can be invested in commercial or industrial properties, among other types. The average return for Singapore-based REITs over the past five years has been around 25%. Out of the 16 local REITs evaluated, only four of them made losses over the past five years, which suggests that the likelihood of making a profit by investing in a single Singapore REIT is relatively high.
Now, let’s take a look at the overseas REITs.
There are 18 listed in this comparison, and the majority of them have lost money over the past five years, with an average return of negative 12%. Even if investors collected dividends during this period, it’s likely that they still experienced losses.
These results support my initial observation that Singapore REITs tend to outperform their overseas counterparts, with exceptions like Mapletree Logistics Trust, which has achieved an impressive 83% return, and Frasers Logistics and Commercial Trust, with a 71% return, as well as CapLand India Trust, with a return of 44%.
It’s worth noting that this comparison is based on five years of performance data, which may not be sufficient for some investors. However, it’s important to consider that even over a longer period of time, the performance of overseas REITs may still be underwhelming compared to Singapore-based REITs.
10-year Performances
It’s worth noting that many of the overseas REITs listed on the SGX have been listed within the last 10 years, which is why I focused on the past five years as a comparison point. If we were to compare their 10-year performance, it’s worth noting that the number of overseas REITs would drop off in the table below.
The average return for Singapore REITs over the past 10 years has been 63%, compared to an average of 40% for overseas REITs. Even when looking at the longer-term performance, Singapore REITs still appear to be the stronger investment choice.
I’ve dived deeper into the 10 year performance of Singapore REITs here.
Advantages of Singapore REITs
Next, I would like to explain why I think Singapore REITs have more advantages than overseas REITs. This is not to say that overseas REITs are inferior, but rather to highlight some of the challenges they face.
#1 Strong Singapore Dollar
Firstly, the strength of the Singapore dollar is a key advantage for Singapore-based REITs. Many overseas properties generate rental income in foreign currencies, and when these REITs convert their earnings back to Singapore dollars, they may experience forex losses due to fluctuations in exchange rates. The Singapore dollar has historically been a relatively strong currency, making it less favorable for converting foreign currencies.
To illustrate the impact of Forex losses, let’s take the example of Cromwell REIT, which has properties in Europe and is listed on both the Euro and Singapore dollar exchanges. In its last financial year, if Cromwell priced its net asset value (NAV) in Singapore dollars, it would have seen a substantial 7.2% drop in its book value due to Forex losses. This shows that Forex risk is not to be taken lightly, and it can have a significant impact on a REIT’s performance.
Similarly, during its 1Q2023 results, First REIT cited “depreciation of foreign currencies against the Singapore Dollar” as one of the reasons for the decline in distribution per unit. This illustrates the impact of currency fluctuations on overseas REITs and how they can affect the returns that investors receive.
#2 Singapore’s Resilient Economy
Singapore has a resilient economy, and we experienced a short recession during the COVID-19 period, but it didn’t have a significant impact on Singapore’s overall economy. We rebounded quickly and stabilized faster than many other countries. This cannot be said for many developing countries that might still struggle to get their economic engines running again. Singapore’s strong economic foundation is one of the reasons why Singapore-based REITs tend to perform well.
To compare the performance of Singapore-based REITs versus overseas REITs, we can look at healthcare REITs as an example.
ParkwayLife REIT owns top-notch private hospitals like Gleneagles and Mount Elizabeth, mostly located in Singapore. Meanwhile, First REIT has the majority of its hospitals in Indonesia and only a few assets in Singapore. Both REITs also have properties in Japan, but the majority of their revenues come from Singapore and Indonesia, respectively.
Let’s take a closer look at ParkwayLife REIT. As we can see from their distribution per unit (DPU) chart, their DPU has been consistently growing since their IPO. Even during the COVID-19 pandemic in FY2020 and leading up to FY2021, they managed to increase their DPU despite the challenging economic conditions. This is a testament to the resilience of the properties under their portfolio, which mainly generate revenue from Singaporean hospitals.
Next, let’s take a look at First REIT’s distribution per unit (DPU) over the years. As you can see, there was a sharp drop in 2020 due to the impact of the COVID-19 pandemic, and the DPU has not fully recovered to pre-COVID levels since then.
In terms of share price, ParkwayLife REIT has increased by 69% over the past five years, while First REIT has slumped by 68% for the same period. This stark contrast can be attributed to the more resilient economy in Singapore, where ParkwayLife REIT’s properties are mainly located, as compared to the Indonesian economy, where the majority of First REIT’s hospitals are situated. Despite the ongoing economic recovery, it seems that Indonesia’s healthcare spending has not yet rebounded to pre-pandemic levels.
#3 Singapore’s Stability
The third factor is the business-friendly environment in Singapore. The country’s policies are consistent, and there are no big surprises that could potentially shock businesses. There’s political stability too, with one party in charge for a long time, providing continuity in the political direction of the country. Finally, Singapore is not prone to natural disasters, making properties in the country comparatively safer than in other countries. This stability is a significant advantage for Singapore REITs.
While Singapore has opened up, China remained in lockdown for a good part of last year. This affects the footfall in the malls and in turn affect the rental income of the retail REITs. Moreover, the clampdown on speculations in China’s property market could also affect the valuations of these REITs’ properties.
There are several listed REITs in Singapore with exposure to China, including Sasseur REIT, Capitaland China Trust, BHG Retail REIT and Dasin Retail Trust. We can consider Frasers Centrepoint Trust, a 100% Singapore-based retail REIT, for performance comparison purposes.
While Sasseur REIT outperformed with a 36% gain in the last 5 years and surpassed Frasers Centrepoint’s return of 28%, the remaining China-based REITs have incurred losses, with Dasin Retail Trust plunging as much as 75%. This reinforces the idea that investing in REITs outside of Singapore may yield lower returns.
It’s worth noting that the previous comparison was made between a developed country like Singapore and developing countries like Indonesia and China. To provide a more comprehensive analysis, let’s now include another developed country, the US.
This chart shows the office occupancy rates in the US, with a noticeable drop after the pandemic. In 2022, the vacancy rate reached 12%, indicating that only 88% of the offices were occupied. This can be attributed to the work from home culture that has continued even after the pandemic.
In comparison, Singapore’s occupancy rate has also decreased, but the vacancy rate is much lower at just 5%. This means that the average occupancy rate is still 95%, which is considered healthy. As a result, the impact on Singapore’s office REITs has been less severe compared to their US counterparts.
The following chart highlights the impact on US office REITs. KORE REIT was down 33% over the past five years, Prime REIT was down 59%, and Manulife US REIT was down 71%. The acceleration of these declines started at the beginning of last year, which was caused by the rise in interest rates and the resulting decline in attractiveness of these REITs.
The work-from-home trend also played a significant role, as the demand for office space decreased while these REITs still had to make higher interest payments for their US properties. The performance of US-based REITs shows that even a developed country like the US may not provide the expected stability for its REITs.
Geography cannot explain all the differences
Of course, geographic location is not the only factor that determines REIT performance.
As I’ve shown, there are outliers such as Sasseur REIT which outperformed a Singapore-based retail REIT. Other factors such as property location, sponsor strength, and management quality can also affect performance. However, the statistics still indicate that overseas REITs generally underperform on average, and there are valid reasons for this.
Overseas REITs often face more challenges compared to Singapore-based REITs, which could contribute to their lower performance.
