Are REITS still attractive?
The past few years have been kind to investors in Singapore’s listed real estate investment trusts, or REITS. With interest rates at record lows, these lovely holding companies of shopping malls and retail and office spaces have returned a good clip to investors. But with interest rates in America rising and Singapore set to follow suit, are Singapore’s REITS still a good investment idea? According to OCBC, the sector is still worth a look but the value is no longer “compelling.”
One reason investors like REITS so much is that they offer a far higher yield than Singapore Government bonds. The FTSE ST REIT Index is currently trading at 4.23% higher than Singapore Government’s 10-year bond yield. As an interesting aside, the research firm compared REITS in other markets and found that in Europe the difference was 4.15%, in Japan 3.79%, Hong Kong 3.25%, Australia 2.55%, and the United States just 2.05%.
So compared to other markets, Singapore does look to offer a better margin over Government bonds which carry no risk. Nevertheless, rising interest rates will dampen income for the REITS as they will have higher borrowing costs, so investors should be selective. Meanwhile, DBS reckons that with consensus expectations for Singapore’s GDP growth to be revised upwards to GDP growth of 2.3%, office and industrial REITS, specifically the business parks and hi-tech segments, should do well.
With the supply for both sectors easing from next year, the brokerage believes the prospects of a recovery in spot rents next year are increasing, which is supportive of its positive stance on the office and industrial space. On the other hand, the other risk to retail REITS is the imminent launch of e-commerce giant Amazon which could eat into mall retail earnings.
In terms of overall S-REIT valuation, the average yield spread is at 4.1%, close to the average yield spread of 4.2% since 2010, says DBS. It notes downside risk to S-REIT share prices are limited near term, taking into consideration the risk of a very hawkish Fed receding.
The sector is still worth a look but the value is no longer “compelling.”