REITS may be ripe for a relook after beating
Sector valuations, trading at a discount, attractive now
SINGAPORE: Real estate investment trusts (REITS) are looking to make a comeback in 2023 after a torrid 2022, with the pace of interest rate hikes in the United States expected to slow, say analysts.
Favoured by investors for their dividends, REITS took a beating in 2022 as rising inflation and interest rates dented sentiment in the sector. High interest rates make it dearer for REITS, which are debt-intensive, to repay their loans.
In Singapore, the iedge S-reit Index – the benchmark for Singapore-listed REITS (S-REITS) – fell by 12% year-on-year in 2022, according to data from the Singapore Exchange (SGX). In contrast, the Straits Times Index yielded total returns of 8.4%, including dividends, SGX data showed.
But Benjamin Tai, director of the global real asset securities group at Blackrock, said REIT valuations in many markets were becoming more attractive now, with the sector trading at a 30% discount to its net asset value.
“Historically, that is actually quite a nice mark of a rebound, which could take place in the following 12 to 18 months,” Tai said at a market outlook event organised by digital wealth platform Endowus.
DBS Group’s head of property research Derek Tan told The Straits Times that the overhang on the sector from US interest rate hikes was approaching its tail end and that historically, S-REITS have tended to outperform the market.
He added that while interest costs will continue to eat into S-REIT earnings throughout 2023, the markets have already factored in the impact of interest costs on REIT unit prices.
Still, Maybank Securities analyst Krishna Guha warned that, assuming interest rates stay elevated, the full impact of high interest rates in 2022 will be felt only later as the debt portfolios of REITS are repriced over time.
Blackrock’s Tai said S-REITS have relatively higher leverage, or debt versus assets, than their global peers.
Using total debt divided by total assets as a measure of leverage, he said S-REITS were somewhere closer to the 40% range, compared with their Australian and US peers which are around 20% leveraged.
He added that because of their relatively higher leverage, growth in the S-REITS’ distribution per unit – the dividends that a unit holder gets for each unit of the REIT – will be “a little challenged over the next few years”.
This is because there will still be upward pressure on their interest rates in 2023, so revenue growth will be limited, he added.
There were 40 S-REITS and property trusts listed on the SGX with an average debt-to-asset ratio of 37.2% at the end of 2022. They remain within the maximum leverage limit of 50% that the Monetary Authority of Singapore has set for S-REITS.