COVID-19 SPECIAL

New normal for S-Reits

Pandemic has hit them hard, with performance varying from sector to sector in current climate

The Singapore bourse has established itself as a strong platform for yield plays over the years and nowhere has this been more apparent than in the S-Reit segment.

S-Reits (Singapore Exchange-listed real estate investment trusts) have yielded anywhere between 6 per cent and 9 per cent over the past three years, thanks to a combination of strong portfolios, robust earnings and generous dividend payout policies.

Total returns would be even higher if capital gains - unit price rises - were factored in.

With a combined market value of around $90 billion, S-Reits make up over 10 per cent of the market capitalisation of the Singapore Exchange (SGX) and about 30 per cent of turnover.

Industrial Reits account for a third of that market cap, followed by retail trusts at 29 per cent and office Reits at 22 per cent.

In fact, S-Reits have traditionally been considered such safe high-yield investments that many private bankers routinely promoted them to clients for their "bond-like" qualities.

But the onset of the Covid-19 pandemic has hit S-Reits hard. In the first four months of this year, total returns fell almost 40 per cent as both prices and payouts dived. Though there has been some recovery over the past three weeks, they remain around 20 per cent below December 2019 levels.

Broadly speaking, S-Reits operate in four major sectors - retail, hospitality, industrial/logistics and office.

Analysts like Azure Capital's Terence Wong warn that there is an emerging new normal for S-Reits in terms of performance, pricing and yields, adding that, given current market conditions, performance will vary from sector to sector.

"Some have weathered the storm better than others," he noted. "For example, logistics and industrial Reits have managed to ride out the volatility better than the retail and hospitality players. This trend could continue to play out over the coming year."

RETAIL REITS

Circuit breaker measures have hit shopping malls and food and beverage (F&B) outlets particularly hard. As a result, retail Reit prices are down by as much as a third, and several have also started cutting back dividend payouts.

Broadly speaking, Singapore Exchange-listed real estate investment trusts (S-Reits) operate in four major sectors - retail, hospitality, industrial/ logistics and office. S-Reits have yielded anywhere between 6 per cent and 9 per cent over the past t
Broadly speaking, Singapore Exchange-listed real estate investment trusts (S-Reits) operate in four major sectors - retail, hospitality, industrial/ logistics and office. S-Reits have yielded anywhere between 6 per cent and 9 per cent over the past three years. But circuit breaker measures have hit shopping malls and food and beverage outlets particularly hard. As a result, retail Reit prices are down by as much as a third, and several have also started cutting back dividend payouts. PHOTO: FRASERS CENTREPOINT MALLS

Competition from the e-commerce sector had prompted many malls to turn to F&B tenants to occupy floor space, with some leasing out up to 20 per cent of lettable areas to these players.

But the lockdown has hit that F&B market hard, and to make matters worse, e-commerce has gained more followers. With many of us at home, it's been a double whammy for many malls.

That said, analysts believe some retail Reits stand out from the rest.

"We expect suburban malls located near transport nodes and large residential catchment areas to remain relatively more defensive although they will not be unscathed from the challenges," noted OCBC Investment Research last week.

Players such as CapitaMall Trust, Frasers Centrepoint Trust and Mapletree Commercial Trust are generally favoured by analysts.

Some market experts reckon that retail Reits could even benefit from a phenomenon called "revenge spending" when the lockdown is lifted as consumers with nowhere else to travel descend en masse on malls, such as has been the case in China lately.

HOSPITALITY REITS

Hospitality is another sector that has taken a hit.

The almost complete drop in tourism during the past few months has impacted hotel occupancy badly. As a result, the likes of CDL Hospitality Trust, Far East Hospitality Trust and Ascott Reits have been heavily weighed down.

Fortunately, however, some of these have benefited from being selected to house returning residents to serve out their two-week quarantines, and many also house front-line workers. This has lifted occupancy and provided some income flow.

Also, several players such as CDL Hospitality and Far East Hospitality have their incomes underwritten by their master lessors or sponsors.

Despite the challenges, some analysts see hospitality Reits as alpha plays that could rebound quickly if and when travel and tourism gets back on track next year. Again, this has been the case in China following the recent reopening, with mid-tier hotels seeing a rapid increase in occupancy levels after travel restrictions were lifted.

INDUSTRIAL REITS

The biggest S-Reit segment on the SGX is industrial-logistics.

Players such as Ascendas, the Mapletree group, Keppel DC, ESR and Frasers Logistics have shown resilience under the circumstances. However, much will also depend on lease renewals and positive rental reversions.

The Covid-19 situation has also amplified the critical role of supply chain management and e-commerce, which could benefit industrial and logistics Reits.

Ascendas is the top-rated player in this segment. Its units are already back to December levels, but OCBC sees more upside towards a target of $3.52, while Maybank Kim Eng has a target price of $3.35. Another strong player is Keppel DC Reit, which OCBC targets towards $2.54.

COMMERCIAL-OFFICE REITS

Offices are another significant S-Reit segment, but many market watchers are trying to figure out how the work from home regime could impact the demand for offices, here and worldwide.

Could decentralisation and business continuity planning dent the demand for office space? Could companies follow in the footsteps of Twitter and Facebook, which are pushing to make working from home a permanent option?

Still, given that there has been no huge inflow of office space supply to the market of late, the likelihood of a major drag looks unlikely - at least in the medium term. And despite the allure of working from home, companies will still want space where staff can gather, communicate and get to know one another.

But this is a space (no pun intended) that still bears watching.

CapitaCommercial Trust and Keppel Reits are the two biggest players in this segment.

OTHERS

Many S-Reits also offer investors exposure to offshore markets such as Europe, the United States and China. There are at least a dozen of these on offer on the SGX. Some of the more prominent players include Cromwell Reit, Manulife Reit, Frasers Logistics, EC World and Sasseur Reit. Then there is Parkway Reit, which provides exposure to the healthcare sector.

CONCLUSION

The bottom line, despite the business and macro challenges, is that most S-Reits remain financially sound-and-safe yield plays, boasting strong balance sheets, low gearing and good dividend yield over the medium term.

As Maybank Kim Eng noted in a May report, many S-Reits boast strong retained capital.

But given their specific market niches, expect varying returns from segment to segment during the year ahead.

As a general rule, dividend payouts in the hospitality and retail segment are likely to be more modest.

Analysts reckon dividend per unit (DPU) in these sectors could fall by as much as 30 per cent in the coming year, before rebounding in 2022. Office Reit dividends could slide by about 15 per cent while DPU for industrial trusts could remain flat.

Gearing, income flows, length of leases and positive rental reversions will be key factors to watch. Capital retention and maintaining cash flow visibility will be the name of the game for the next 12 months.

But beyond dividends, investors should also keep an eye out for potential capital appreciation.

Many S-Reits have been hammered (some would argue, unfairly) this year and most are trading below book value now. This could provide upside opportunities as the market and the economy gradually recover.

Given how interest rates are heading towards negative territory amid aggressive monetary easing worldwide, S-Reits might be a good option for investors seeking a decent and sustainable return.

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A version of this article appeared in the print edition of The Straits Times on May 26, 2020, with the headline New normal for S-Reits. Subscribe