- In the year-to-date, the SGX S-REIT Index has generated a 15.5% price gain and 21.2% total return (inclusive of dividends), compared to the benchmark STI’s 15.6% price gain and 19.0% total return. Singapore’s 3-month SIBOR has gained 16.2% in the same period.
- In theory, a rise in interest rates will lead to an increase in borrowing costs, which impacts the profitability of REITs and their ability to make acquisitions. However, gradual rate increases are also often associated with improving economic growth, which indirectly boosts REITs’ earnings.
- The SGX S-REIT Index maintains a median gearing ratio of 34.0%, below the 45.0% limit. In terms of valuation, yield spreads between S-REITs and 10-year government bonds are at 385bps, 39bps above the long term average of 346bps.
In the year-to-date, the SGX S-REIT Index has generated a 15.5% price gain and 21.2% total return (inclusive of dividends), compared to the benchmark STI’s 15.6% price gain and 19.0% total return.
As illustrated below, the performance of the SGX S-REIT Index surpassed the benchmark STI in August 2017 on the back of positive sentiment in the Singapore property market.
In same period, the 3-month Singapore Interbank Offer Rate (SIBOR), a benchmark interest rate in Singapore, has gained 16.2% following two interest rate hikes by the Fed in March and June.
In theory, a rise in interest rates will lead to an increase in borrowing costs, which impacts the profitability of REITs and their ability to make acquisitions.
As REITs rely on debt to finance their property acquisitions, they will incur higher borrowing costs in the event of higher interest rates.
This will result in lower cash flow for shareholder dividend payouts, hence to maintain the same yields, REITs will face downward price pressures.
However, as mentioned in an earlier market update, gradual interest rate increases are often associated with improving economic growth.
As the economic outlook improves, rents, vacancy rates and other key operating metrics important to REIT cash flows also tend to improve.
Thus, interest rate hikes may be indirectly associated with higher REIT earnings, which may help to offset increased borrowing costs.
It should be noted that while REITs are sensitive to rising interest rates, REITs are managed by managers who have a say in navigating the different interest rate environments.
Furthermore, sensitivity of different REITs will also vary depending on the amount of leverage taken on by the REIT amongst other factors.
REITs’ Median Gearing Ratio Below Global Peers and 45% Limit
In January 2016, the gearing ratio or leverage limit for REITs, which takes into account the proportion of debt versus assets, was increased from 35% to 45% of the REIT’s total assets.
The SGX S-REIT Index maintains an median gearing ratio of 34% where the highest ratios are in Diversified REITs, and the lowest are in the Specialised REITs sub-sector.
Published in Nov 2016, a stress test by the Monetary Authority of Singapore (MAS) assessed the resilience of REITs in a situation where their EBITDA fell 35% while interest rates rose three percentage points.
The report noted that REITs listed here have sufficient earnings cushion to absorb the impact of higher interest rates even in challenging conditions.
Note that REITs are also diversified by the type of property that they invest in, such as retail shopping malls office towers, industrial parks and logistic parks.
Singapore REITs are also diversified by geographies, offering investors a choice of Singapore-based properties, overseas-based properties in addition to REITs that invest in property both in Singapore and overseas.
Hence, investors should consider multiple factors beyond gearing ratios when investing in REITs.
Yield Spreads Above Long Term Average
Yield spreads between S-REITs and 10 year government bonds stand at 385bps, 39bps above the long term average of 346bps.
According to a market commentary by NAREIT (National Association of Real Estate Investment Trusts),
yield spreads – defined as the difference between the REITs’ dividend yield and the market yield on 10-year government securities – can be a more useful investment metric than absolute yields, particularly for investors interested in capital appreciation as well as income.
Based on historical data on US REITs, the commentary concluded that in cases where the yield spread has been unusually high in the past (relative to its long term average), that situation has generally signalled that REIT total returns in the future relative to the broad stock market would be abnormally strong over the next several years.
As detailed in the table below, all 31 of the REITs and the six Stapled Trusts have generated positive returns in the 2017 year through to 17 October, with total returns ranging from 4.3% for Fortune REIT (in SGD terms) to 34.9% for CDL Hospitality Trusts.
|Name||SGX Code||Market Cap S$M||Last Price*||Price Change YTD %||Total Return YTD %||Gearing Ratio %||Dvd Ind Yld %|
|Mapletree Greater China Commercial Trust||RW0U||3,346||1.190||25.3||29.7||39.4||6.2|
|Viva Industrial Trust||T8B||926||0.955||26.5||33.8||38.7||7.6|
|Soilbuild Business Space REIT||SV3U||725||0.690||7.8||15.2||37.5||8.6|
|Health Care REITs|
|Parkway Life REIT||C2PU||1,670||2.760||16.9||21.5||37.3||4.6|
|Hotel & Resort REITs|
|CDL Hospitality Trusts||J85||1,953||1.630||21.6||34.9||38.6||5.9|
|OUE Hospitality Trust||SK7||1,452||0.805||22.0||28.7||38.0||6.3|
|Frasers Hospitality Trust||ACV||1,421||0.770||18.5||22.7||34.0||6.3|
|Far East Hospitality Trust||Q5T||1,297||0.700||16.7||22.5||33.0||5.9|
|Ascendas Hospitality Trust||Q1P||964||0.855||21.3||26.1||32.7||6.6|
|Mapletree Logistics Trust||M44U||3,755||1.230||20.6||29.2||38.9||6.1|
|Mapletree Industrial Trust||ME8U||3,416||1.895||15.2||20.9||29.8||6.1|
|Frasers Logistics & Industrial Trust||BUOU||1,693||1.120||21.1||27.5||27.8||6.9|
|AIMS AMP Capital Industrial REIT||O5RU||918||1.435||9.5||16.1||36.2||7.5|
|Cache Logistics Trust||K2LU||890||0.835||3.1||14.1||43.2||8.7|
|EC World REIT||BWCU||611||0.780||2.6||8.8||26.9||7.7***|
|Sabana Shariah Comp Ind REIT||M1GU||490||0.465||22.4||29.9||36.8||8.1|
|Capitaland Commercial Trust||C61U||5,274||1.660||12.2||22.2||28.4||5.6|
|Frasers Commercial Trust||ND8U||1,128||1.400||11.1||17.4||35.8||7.1|
|OUE Commercial REIT||TS0U||1,102||0.715||2.9||10.2||34.3||6.8|
|Manulife US REIT**||BTOU||968||0.900||2.3||19.4||33.6||7.2|
|Capitaland Mall Trust||C38U||7,269||2.050||8.8||13.4||31.3||5.4|
|Mapletree Commercial Trust||N2IU||4,460||1.550||11.1||16.0||36.4||5.7|
|Frasers Centrepoint Trust||J69U||2,020||2.190||15.3||20.3||30.0||5.4|
|Starhill Global REIT||P40U||1,690||0.775||4.7||9.8||35.2||6.4|
|Capitaland Retail China Trust||AU8U||1,520||1.685||23.0||31.4||34.9||6.0|
|Lippo Malls Indonesia Retail Trust||D5IU||1,228||0.435||17.6||25.3||30.2||8.1|
|BHG Retail REIT||BMGU||374||0.750||14.5||23.3||27.5||6.6|
|Ascott Residence Trust||A68U||2,609||1.215||7.5||19.7||31.1||6.4|
|Keppel DC REIT||AJBU||1,516||1.345||13.5||19.4||32.9||4.8|
Source: Bloomberg & SGX StockFacts (data as of 17 October 2017).
*Last price of companies are denoted in their respective trading currencies
CDL Hospitality Trust, OUE Hospitality Trust, Frasers Hospitality Trust, Far East Hospitality Trusts, Ascendas Hospitality Trust and Viva Industrial Trust are Stapled Trusts. Table excludes Saizen REIT
**Note Fortune REIT is traded in HKD and Manulife US REIT is traded in USD. Except for Last Price, SGD equivalents are shown in table. Market Capitalisation calculation of Manulife US REIT includes Rights units, according to Bloomberg.
***Based on annualised estimations
This article first appeared on SGX Research.