The rising interest rate environment has not been good for REITs. Nonetheless, let us look at how some of these REITs are faring.
Today, we’ll look at the larger Singapore REITs, especially those in the Straits Times Index, to see how they’ve performed.
Download our full 3Q22 S-REITs Report here.
Singapore REITs’ Overall Performance
Before we get there, let’s take a look at the overall performance of Singapore REITs year to date.
We could see an overall decline from the iEdge S-REIT index, which measures the performance of Singapore’s largest and most tradable REITs.
Year to date, the asset class has fallen by over 19%, underperforming the Straits Times Index, which has gained 3%. The sharp rise in interest rates is a key reason why REIT prices are falling. In general, higher interest rates are bad for REITs, a highly leveraged asset class that is heavily reliant on debt. With rising interest rates, REITs’ borrowing costs rose, reducing their earnings.
Such an increase in interest rates has also caused local government bond rates like Singapore Savings Bonds and Singapore Government Securities to climb, prompting a revaluation of REITs as investors demand a higher yield given the increase in risk-free return.
Other broad-based factors were already discussed here as to why Singapore REITs have declined so dramatically recently.
Singapore REITs individual performance
That being said, not all REITs are created equal, with some larger and more well-known REITs being far more resilient. As such, let us examine the performance of REITs in the STI index, which have a higher market capitalisation.
Before we get there, here’s a summary of their performance.
| S-REITs | Ticker | Market Cap | Country Exposure | Sector | Year-to-date returns |
| Capitaland Integrated Commercial Trust | SGX:C38U | $13.5B | Singapore, Australia, Germany | Retail and Office | -0.5% |
| Mapletree Pan Asian Commercial Trust | SGX:N2IU | $8.6B | Singapore, China, Hong Kong, Japan, South Korea | Retail and Office | -16.2% |
| Mapletree Logistics Trust | SGX: M44U | $7.7B | Singapore, Australia, China, Hong Kong, India, Japan, Vietnam, Malaysia, South Korea | Logistics | -14.4% |
| Frasers Logistics & Commercial Trust | SGX:BUOU | $4.4B | Singapore, Australia, Germany, The Netherlands, UK | Logistics | -22.9% |
| Keppel DC REIT | SGX:AJBU | $3.2B | Singapore, Australia, Germany, UK, Italy, Malaysia, The Netherlands, Ireland | Data Centre | -25.9% |
| Mapletree Industrial Trust | SGX: ME8U | $6.2B | Singapore, USA | Industrial and Data Centre | -15.1% |
| Capitaland Ascendas REIT | SGX: A17U | $11.6B | Singapore, Australia, USA, UK/Europe | Industrial and Data Centre | -6.8% |
Retail and Office REITs
We have two diversified REITs in the retail and office space: Capitaland Integrated Commercial Trust and Mapletree Pan Asian Commercial Trust.
In summary, both of these REITs have benefited from the trend reversal as Covid 19 becomes a thing of the past. This comes as safe distance measures have steadily eased, as has the reopening of borders, resulting in both retail sales recovery and people returning to work. Year to date, there has been a favorable rent reversion trend on both fronts, providing both REITs with a revenue boost.
According to CBRE study, additional recovery is expected to occur in 2023.
Breaking it down to the individual REIT.
CapitaLand Integrated Commercial Trust (CICT)
CICT has 92% of its property in Singapore, witnessed a 13.7% growth in gross revenue as its retail and office assets improved while net profit income jumped by 12.7% for the quarter. This increase was accelerated for CICT, particularly because downtown malls had a faster rebound with border easing and an increase in office workers.
With 80% of its borrowing at fixed interest rates, CICT has managed the impact of rising interest rates well, with an average cost of debt of roughly 2.5%.
Finally, with a high committed occupancy of 96.8% for retail and 94.1% for office, as well as more potential growth in the future, CICT has demonstrated strength in its latest earnings which may explain why it dropped the least of all the REITs we are discussing today.
Mapletree Pan Asia Commercial Trust (MPACT)
Recently renamed following the merger of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT), MPACT has also performed well as its retail and office portfolios (particularly those in Singapore) have benefited from the relaxation of restrictions.
To date, VivoCity and MapleTree Business City, the heart of MPACT, have seen rental increases of 7.7% and 3.8%, respectively, increasing the group’s revenue and NPI. As a result, 1H FY22/23 DPU was up 12.5% year on year. (It should be noted that an MCT Clean-up Distribution of 3.04 Singapore cents per unit was paid on 25 August 2022 for the period from 1 April 2022 to 20 July 2022.)
Aside from that, MPACT appears to be in good shape in terms of leases, with a committed occupancy of 96.9%. Likewise for its balance sheet, about 72.5% of its debts are fixed and has a weighted average all-in cost of debt of 2.44%.
However, its share price has not reflected this, most likely due to the merging of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust.
Many investors saw this combination as a dilution of asset quality. While MNACT’s assets were not insignificant, they were ultimately inferior to MCT’s Vivo City and MBC. As a result, the initial sell-off happened.
Next, with about half of its revenue now coming from Hong Kong, this merger had increased volatility and risk for MPACT investors. In terms of performance, the malls in Hong Kong have not benefited from the reopening due to constant strict covid protocols.
Looking ahead, there are signs of increased footfall and tenant sales, but further relaxation of covid restrictions and the full reopening of the Hong Kong border are required to act as a catalyst for recovery. This is something that remains to be seen when it will occur.
Logistics REITs
Next, we have a few REITs in this category.
Mapletree Logistics Trust (MLT)
MLT is a logistics real estate investment trust focused on Asia. The firm invests in a diversified portfolio of income-producing logistics real estate in Singapore, Hong Kong, Japan, China, Australia, South Korea, Malaysia, Vietnam, and India.
Gross revenue for the second quarter of FY22/23 was S$183.9 million, an increase of 11.4% year on year. Similarly, net property income increased by 10.8% to S$160.0 million. This growth was driven by improved revenue from existing properties as well as contributions from prior acquisitions.
Unfortunately, portfolio occupancy fell slightly to 96.4%, down from 96.8% in the prior quarter. Aside from that, the company’s balance sheet appears to be in decent shape, with around 82% of total debt being fixed and approximately 72% of its income stream hedged in Singapore Dollars for the next 12 months.
Nevertheless, even with hedges in place, MLT has said that higher interest rates and currency depreciation in regional currencies against SGD will continue to have a negative impact on MLT distribution revenue. This is undoubtedly true for MLT, as it is for all other REITs with assets located around the world. As the SGD strengthens, many of the revenues generated abroad are now worth less, affecting the company’s overall revenue.
Frasers Logistics & Commercial Trust (FLCT)
FLCT operates in both the industrial and commercial segments. It owns 105 logistical and commercial assets spread throughout five major developed countries: Australia, Germany, the United Kingdom, Singapore, and the Netherlands.
Unfortunately, revenue and NPI decreased by 9.7% and 10.6%, respectively, in 2HFY22. The year-on-year decreases were primarily attributable to the sale of Cross Street Currency and the weaker exchange rates. As a result, its distribution per unit for 2HFY22 declined by 2.8%.
FLCT’s portfolio is operationally sound, with a high portfolio occupancy rate of 96.4%. 81.7% of its loans were similarly fixed, and with a gearing of 27.4%, the company appears to be the least affected by rising interest rates.
Having said that, because the majority of its assets are based abroad, the company is not immune to currency risk and is, in fact, one of the most susceptible on the list. Given the unfavorable movement of the AUD, EUR, and GBP against the SGD, this has had and will continue to have an adverse impact on FLCT’s NAV and distributable income.
Data Centre REITs
Similarly, a few REITs are classified in this category. Let us begin with Keppel DC REIT, a pure data centre REIT.
Keppel DC REIT
Keppel DC REIT owns an income-producing real estate portfolio primarily employed for data centre purposes, as well as real estate and assets required to support the digital economy.
According to its most recent data, gross revenue increased by 1.4% year on year for the quarter. This minimal gain was attributable to factors such as decreased contributions from some Singapore colocation assets (facilities charges including energy costs and DXC4 provision), the depreciation of EUR, AUD, and GBP against SGD, and the disposal of iseek Data Centre.
Nonetheless, distributable income and DPU for the third quarter of 2022 climbed by 9% and 5%, respectively, year on year.
The company’s financial sheet also shows a well-spread debt maturity profile, with the majority of debt maturing in 2026 and beyond. Interest rate risk is also adequately managed, with 74% of its loans fixed, bringing its cost of debt to 2.3% in the most recent quarter.
On the tenant front, Keppel DC has a portfolio occupancy of 98.6% and a weighted average lease expiry of 8.7 years. This is fairly lengthy, especially in an inflationary economy where rent can be continually revised upwards. The good news is that more than half of its portfolio has built-in revenue and rental escalations based on the Consumer Price Index, comparable indexation, or fixed rate systems.
Overall, Keppel DC REIT has been the hardest hit of the REITs discussed here. The REIT, while appearing resilient, is currently suffering mediocre growth, and considering that this REIT was given a high valuation during the pandemic, its collapse today is also a reevaluation by investors who may have overvalued it back then.
Industrial and Data Centre REITs
This portion has two REITs: Mapletree Industrial Trust and Capitaland Ascendas REIT, which contain a mix of industrial and data centre properties. As you can see, it may be because of this diversification that both REITs did not suffer as much as the pure Data centre like REIT Keppel DC REIT.
Mapletree Industrial Trust
Mapletree Industrial Trust (MIT) invests in a portfolio of income-producing real estate primarily used for industrial purposes in Singapore, as well as for data centres in locations other than Singapore.
As of 30 September 2022, MIT’s assets comprised 85 properties in Singapore and 56 properties in North America (including 13 data centres held through the joint venture with Mapletree Investments Pte Ltd).
Gross revenue and net property income increased 12.8% and 8.3% year on year, respectively, to S$175.5 million and S$130.3 million in 2QFY22/23. This is far better than Keppel DC REIT, which is only focused on data centres; however, the amount available for distribution to unitholders for 2QFY22/23 only increased by 0.7% year on year.
MIT’s average overall portfolio occupancy for 2QFY22/23 climbed to 95.6%, with favourable rental revisions for the Singapore portfolio.
Furthermore, as of 30 September 2022, about 74.2% of MIT Group’s gross borrowings were hedged via interest rate swaps and fixed rate borrowings, reducing the impact of interest rate swings on distributions. Consequently, the weighted average all-in funding cost for the second quarter of fiscal year 22/23 was 2.9%.
Overall, while not as severe, MIT forecasted that growth would fall to 3.2% in 2022 and 2.7% in 2023, owing to an uncertain global outlook and growing fear about an impending recession.
Capitaland Ascendas REIT (SGX: A17U)
CapitaLand Ascendas REIT is the largest listed Business Space and Industrial Real Estate Investment Trust. As of 30 June 2022, it owned 228 properties in three key segments:
- Business Space and Life Science (48%)
- Logistics (25%)
- Industrial and Data Centres (27%)
Given that this REIT has the least exposure to data centres compared to MIT and Keppel DC, its impact is likewise milder.
Gross revenue increased 13.7% year on year to S$666.5 million in the first half of 2022. This rise was primarily due to contributions from newly acquired properties in Singapore, the United Kingdom/Europe, the United States, and Australia, as well as a built-to-suit development in Singapore during FY 2021 and 1H 2022.
Net property income increased by 7.0% year on year to S$476.9 million, while the total available for distribution increased by 6.3% year on year to S$330.7 million. Despite the increased number of units, the DPU still increased by 2.8%.
On an operational level, Ascendas’ portfolio occupancy rate increased to 94.5%, with a 5.4% positive rental reversion.
Fixed-rate debt as a percentage of total debt was at 78%, with an average duration of 3.4 years and an all-in debt cost of 2.2%.
Apart from that, since the majority of its assets are in Singapore and the United States, Ascendas was less impacted by currency fluctuations than the other REITs, which may explain why the REITs held up well throughout the current REIT sell-off.
Conclusion
All in all, the REITs in the STI components have performed reasonably well compared to the broader REIT market, with 5 of the 7 REITs outperforming the general decline of 19% of the STI ETF.
Of course, we still see varied performance among different REITs depending on the sector and if any major corporate action like a merger was done.
Nonetheless, it appears that the macro factors are the most influential here. Increased inflation and interest rates have pushed down all REITs due to rising costs and reduced earnings.
Aside from that, with the strengthening SGD, many REITs with overseas operations are suffering a more significant fall since their adjusted earnings are hit by the declining value of their overseas income.
