Of late, there have been articles published on local blogs that talk about the demise of REITs as a viable strategy. To review whether there is any truth in this statement, I used the Python programs I wrote to explore the veracity of these statements. As it turns out, there is no basis in being bearish against REITs in Singapore.
Before we begin this exploration exercise, let’s first accept there are risks in REIT investing such as:
- If a second wave begins to infect countries that are re-opening their economy, the outlook for real estate will get worse.
- Beyond the safest data-centre counters, it is realistic to expect dividends to be retained by the REIT managers and rental waivers given to the most vulnerable tenants. We should not be overly pessimistic because there is still a decent chance that the dividends will be paid before 2020 is up.
Beyond the risks mentioned above, here are some market realities about the REITs market:
#1 Singapore REITs underperformed the STI for a short while during the COVID-19 crisis
From 1 Jan 2020 to 28 May 2020, the Lion Philips S-REITS ETF outperformed the STI ETF by a considerable margin losing an annualised 27% when the STI ETF lost an annualised 45.6%. The defensive qualities of REIT ETF were evident as observed on this chart above. While there were some moments where the REITs ETF underperformed, this happened only for a short while where the blue line dipped below the orange line.
The longer-term trend of the REITs ETF doing better can also be observed in recent days.
#2 The data centre REITs generated positive returns during the COVID-19 crisis
There are only two REITs that allow the retail investor to take up substantial investments in data centres – Keppel DC REITs and Mapletree Industrial Trust. Taking up a position in these two counters would result in outperformance throughout the COVID-19 crisis and result in an annualised return of 28% along with a lower risk compared to S-REITS ETF.
Moving forward, selecting data centre REITs in your portfolio would indeed result in lower yields. But doing this could allow bearish investors stay safe if the second wave occurs, it would be able to pay out a small dividend to reward investors for their patience as the market takes a longer time to recover from the COVID-19 crisis.
#3 The hospitality REITs are full of bargains
The worst sector, hospitality, is a good hunting ground for bargain hunters hoping for a turnaround.
As tourists have not returned to Singapore, hotels are still being sustained by Government support and have seen a weaker rebound compared to other REIT sectors losing an annualised 71% compared to the 27% lost by the rest of the REITS sector.
The operative question is, therefore, how cheap this sector is moving forward.
I am now able to obtain fundamental data on Singapore stock counters and arrange it for analysis. A snapshot of the fundamentals of hospitality trusts (except Eagle Hospitality Trust) on the SGX is as follows.
Hospitality Trusts are one of the best instruments to bet on a recovery of the Singapore economy. Even if you are wrong, the low PB ratio will probably cushion further losses, but if you are right, you could be seeing the return of substantial dividends in 2021 and beyond.
In conclusion, the proclamation of the death of the REITs strategy is highly exaggerated. REITs have performed defensively during the COVID-19 crash. Bearish investors can buy REITs that have substantial holdings in data centres as they are highly insulated from a second wave of the COVID-19 virus. Bullish investors looking to bet on a swift recovery can find great bargains in the hospitality sector.
I am personally vested in both REIT sectors with a reasonable amount of leverage.
You can join me in this session to find out more.
“To review whether there is any truth in this statement, I used the Python programs I wrote to explore the veracity of these statements.” – what do you mean by this statement? Would you like to share an example? Thank you.