Singapore's real estate investment trusts (Reits) have survived the worst stretch of the coronavirus pandemic and are now set to stage a broader rebound.
There were plenty of questions raised about the future of Reits amid the mobility restrictions in the first half of the year, but the sector has performed surprisingly well in terms of share price and other valuations.
For instance, the average gearing ratio of the Reit sector stood at 36.4 per cent as at Aug 31 this year - well below the 50 per cent regulatory limit.
The FTSE ST Reit Index has rebounded 38 per cent since the low point in March, easily outpacing the 13 per cent rise racked up by the Straits Times Index (STI).
To be sure, the hit to unit prices at the onset of the outbreak in the first quarter has kept the sector down by 9 per cent in the year to date compared with minus 21 for the STI.
Retail, office and hospitality Reits did suffer more than those in the industrial and healthcare segments.
Industrial Reits have been a particular bright spot, with the global tailwind from growing e-commerce penetration likely to underpin robust demand for logistics space.
However, with economies reopening and curbs on movement and travel being relaxed, the performance gap between these segments offers an investment opportunity.
Analysts including DBS Bank's Mr Derek Tan believe the discount for Covid-19 impacted sectors is too wide to ignore and it is time for investors to venture out of safe industrial trusts.
Reits have been popular with investors seeking a steady income from the relatively high dividend yields they offer.
The payouts come from the distribution of cash flow generated by the properties that a Reit owns. The yield is calculated by dividing expected distributions over a 12-month period by the trust's current unit price.
The yield attraction has become even more compelling after central banks worldwide cut benchmark interest rates to historical lows to help their economies recover from the pandemic-induced recession.
Central banks have flagged their intention to keep rates lower for longer to support recovery, but that also means yields on government bonds will remain depressed.
The pandemic has also put a focus on how retail, office and hospitality will reinvent themselves for the post-Covid world, and that focus may result in rejuvenating the consolidation wave that swept across Singapore Reits last year.
Reits here sealed $23 billion worth of merger and acquisition deals last year, tripling the previous peak reached in 2014, according to Bloomberg data.
"Reits will remain well supported by investors' continued appetite for yields and safe-haven assets, given the low rate environment and cautious global economic outlook," said Mr Colin Ng, head of Asian equities at UOB Asset Management.
He said valuations remain more attractive than government bonds, with Reits delivering an average yield of around 3.6 per cent more than the local sovereign bonds.
This yield spread is close to the long-term mean for Reits, which suggests they are far from overvalued, said Mr Ng.
"Acceleration in online spend is expected to drive the consolidation and rationalisation of retail stores," he added.
However, if retailers can innovate and build strong online platforms, a new omni-channel business model may emerge that could mitigate the negative impact on retail Reits, said Mr Ng.
Faced with ongoing border closures, hospitality Reits have repurposed some of the existing lodging space into niche work suites to cater to remote working requirements.
The impact from social distancing measures has been more immediate for retail and hospitality. But office Reits also face long-term challenges as the usage of work space changes.
Greater emphasis on flexible working arrangements could drive businesses to re-evaluate and recalibrate their office space needs.
Mr Tan of DBS said the divergence in impact from Covid-19 is reflected in the unit price performance.
The overall Reit sector took a steep plunge in the first quarter, with the FTSE ST Reit Index slipping 22.9 per cent.
However, some of the losses were recouped in the second quarter when mobility curbs were relaxed. The Reit index rose 13.8 per cent in the April-June period but the gains were largely led by Covid-resistant industrial and healthcare Reits.
"This is unwarranted in our view, given the positive market data points that flag to a gradual recovery in the economy," noted Mr Tan, who added that it is an opportune time to start investing in some of the underperformers.
Singapore Exchange (SGX) is betting on such strong investor interest in the overall sector.
In August, it launched Asia's first international Reit futures - the SGX FTSE EPRA Nareit Asia ex-Japan Index Futures and the SGX iEdge S-REIT Leaders Index Futures - together with six SGX FTSE Net Total Return Index Futures.
The move to offer futures contracts is one of the many initiatives the SGX has taken after MSCI said in May that it would move licensing for derivatives products on some indexes to Hong Kong.
Since the first initial public offering (IPO) of a Reit here in 2002, the sector has grown faster than anywhere else in Asia.
There are now 44 Reits with a combined market capitalisation of $101 billion, representing about 12 per cent of Singapore's overall listed stocks. Notably, 38 of these Reits hold assets overseas, giving investors an international exposure.
Bloomberg data notes that the SGX has more foreign Reits than anywhere else in the world - a total of seven foreign-currency-denominated trusts.
Canada, London and Dubai have only two, Hong Kong has just one, and the United States, none.
Singapore remains the preferred listing venue for Reits. Out of the $3.1 billion raised here last year, 98 per cent came from Reits.
By contrast, Hong Kong saw its first Reit IPO in six years with China Merchants Commercial Real Estate Investment Trust's debut last December.