Reits with data centres and hospitals among upcoming IPOs: SGX

SINGAPORE - Singapore’s real estate investment trusts (S-Reits) are poised for a resurgence even as the sector is set to grow with an upcoming initial public offering (IPO) pipeline featuring data centres, hospitals and new economy assets.

Mr Matthew Song, head of capital markets at the Singapore Exchange (SGX), said he was confident that the S-Reits sector would attract fund flows again with the US Federal Reserve expected to cut its key policy rate from September.

Lower interest rates typically alleviate pressure on borrowing costs and support a recovery in distribution per unit (DPU) and growth.

“We are confident asset owners and managers will look to reallocate capital back to our S-Reits market,” Mr Song said in his welcome address at an S-Reits outlook seminar organised by the Bank of Singapore and SGX on Aug 29. 

Since Singapore’s maiden Reit listing in 2002, SGX has had more than 50 Reit and property trust IPOs. Following delistings and consolidations, the industry now has 39 actively traded trusts listed on SGX with a combined market capitalisation of $90 billion, representing 13 per cent of Singapore’s overall listed market.

More than 90 per cent of the S-Reits own properties outside Singapore, and are well diversified across different sub-sectors like office, retail, industrial, healthcare, hospitality and data centres.

The Reit universe has expanded beyond the traditional property sectors to include assets supporting the new economy, such as logistics warehouses and green buildings.

Singapore’s financial stability and regulatory environment have made the city a leading private banking and wealth management hub, attracting the rich and family offices that manage their wealth, Mr Song said.

“From our engagement with the single family offices and external asset managers on our Reits market, the feedback and outlook have been increasingly positive, and many would agree that the Reit sector is potentially at an inflection point,” he said. 

Ms Jean Chia, global chief investment officer of Bank of Singapore, said the S-Reits sector has seen a diverse investor base from institutional investors to family offices and retail investors. In the year to date, retail investors have been active, buying $3.4 billion worth of Reits and selling $2.5 billion worth.

She said the sector is trading at “undemanding valuations”.

Share price performance of the S-Reits has lagged the broader Singapore market in recent years, as the sector has been caught in a perfect storm of unprecedented measures being introduced during the Covid-19 pandemic, followed by stubbornly high interest rates and an uncertain growth outlook.

From the start of 2020 to Aug 21, 2024, the FTSE ST Real Estate Investment Trusts Index, or FSTREI, which tracks the performance of Reits listed on SGX, delivered total returns of negative 6.1 per cent, in contrast to a 29.2 per cent gain by the Straits Times Index and 4.1 per cent by the MSCI Singapore Index over the same period.

Mr Andy Wong, senior equity research analyst at the Bank of Singapore, the private banking arm of OCBC Bank, believes the sector is at a turning point.

“Our house view is for the Fed to start lowering its Fed funds rate in September by 25 basis points as inflation falls further towards its 2 per cent target, followed by another 25 basis point reduction in December,” he said.

The global economy has been broadly resilient, and major economies could see a slight pickup in growth in 2025, he added.

Amid this backdrop, he reckons S-Reits are positioned to outperform. “Reduced financing costs could support a gradual recovery in DPU growth. We are also seeing nascent signs of improvement in liquidity in capital markets and funding environment, which could provide an uplift to investors’ sentiment,” he said.

Mr Wong expects S-Reits under his coverage to stage a recovery and deliver an average DPU growth of 3.6 per cent for the next financial year, from negative 2.7 per cent this fiscal year.

From a bottom-up stock picking strategy, he likes S-Reits that are trading at undemanding valuations and backed by strong sponsors; have healthy financial positions that allow them to capitalise on capital recycling activities when liquidity conditions improve further; and ideally have at least some Singapore asset exposure.

Favoured sub-sectors in order of preference are logistics and industrial, hospitality, retail and office.

His top picks are Frasers Logistics & Commercial Trust, CapitaLand Ascott Trust, Mapletree Industrial Trust, CapitaLand Ascendas Reit and Parkway Life Reit. 

The least-preferred picks are Suntec Reit and Keppel DC Reit as they are trading above his fair value estimates.

Mr Wong cautioned that it is difficult to time the bottom of the market, given that risk factors such as the upcoming US presidential election and geopolitical tensions can heighten market volatility. Movements in the 10-year Singapore government bond yield can have a bearing on the share price performance of S-Reits.

Mr Koh Wee Lih, chief executive of Keppel Reit, said its $9.6 billion portfolio of prime commercial assets across the region have enjoyed 97 per cent to 99 per cent occupancy, unlike what office Reits in the US are facing. 

This was attributed to its portfolio of high-quality office spaces and commercial assets strategically located in major urban centres, which appeal to tenants and investors.

Singapore’s office space has been resilient due to its South-east Asia hub status and increased presence of multinational corporations.

Mr Koh added that the Urban Redevelopment Authority has also indicated it would not be releasing new parcels of land in the Central Business District any time soon, and most office supply has already been pre-committed.

Keppel Reit closed at 88 cents, down half a cent on Aug 30.