Are Singapore REITs Still A Buy? All Your REIT Questions Answered

The original version of this article first appeared in The Straits Times.

US stocks have tumbled to fresh lows as markets reacted negatively to the combined effects of rising interest rates, geopolitical risks and global growth slowdown concerns. Amid this turmoil, Singapore REITs (S-REITs) stand out for their resilience compared to their global counterparts. In the first quarter of 2022, the iEdge S-REIT Leaders Index gained 1.3% while global REITs fell 3.8% and the S&P 500 declined 5.5%. 

Are S-REITs still a good investment given rising rates? Ritesh Ganeriwal, Syfe’s Head of Investment Advisory, shared his views in an interview with The Straits Times last Sunday.

“The rise or fall in interest rate itself is not the key driver of REIT performance in the medium to long term – it is the underlying dynamics that matter more. Typically rising interest rates are associated with economic growth and rising inflation, both of which are likely to be positive for real estate investments. Healthy economic growth translates into greater demand for real estate and higher occupancy rates, supporting growth in REIT earnings, cash flow, and dividends. In inflationary periods, real estate owners have the ability to increase rents, and REIT dividend growth has historically exceeded the rate of inflation as a result.”

We talked to Ritesh to learn more about his outlook for S-REITs.

Rising rates are generally seen as a negative for REITs as they increase borrowing costs and drag down profits. Should REIT investors be worrying right now?

Ritesh: This may seem counterintuitive but looking at the evidence, REITs can still do well while interest rates are rising. Let’s look at periods in the past where the Fed funds rate has increased along with the three-month SIBOR rate.

First, the taper tantrum in 2013 when market participants felt the Federal Reserve was removing economic support too early. Over a period of nine months, S-REITs fell by close to 17%. The Fed funds rate was 0% – 0.25% at that time while the 3M SIBOR hovered between 0.37% to 0.4%.

The second time was in 2015 when there were serious growth concerns and global markets retreated amid the Greek debt default, falling oil prices, and slowing growth in China. The Fed funds rate was still near 0% and the 3M SIBOR was around 1.02% to 1.07%. S-REITs fell 9% over a period of eight months during that period.

But between 2015 and 2019, the Fed funds rate had jumped to 2.25% to 2.5% after the Fed raised interest rates. Similarly, the 3M SIBOR rose to 1.88%. During this period, S-REITs gained 73% despite higher rates.

Most recently, from mid March up to 5 May 2022, a period that covers the Fed’s latest rate hike announcement, the i-Edge S-REIT Leaders Index is still up over 2%.

Inflation is creeping higher not just in the US, but in Singapore too. How will this affect S-REITs?

REITs tend to do well during inflationary periods. To use an example from the US, when we compare US REITs and the S&P 500 during different inflationary periods, we see REITs outperforming considerably when inflation is moderately high. Moderate inflation is defined to be more than 2.5% annually.

Singapore REITs A Buy

I expect this trend to play out in Singapore too. The Monetary Authority of Singapore (MAS) expects core inflation to be closer to 3% this year, and the latest CPI-All Items reading reached a high of 5.4%. As prices rise, so do rents. This increases the amount of rental income REITs can earn – benefits that are then passed on to the investor.

Are Singapore REITs still a good buy in 2022?

Singapore REITs are one of the most diversified with broad exposure across industrial, hospitality, retail, office, and healthcare sectors. This makes the S-REIT sector unique in terms of asset and geographical diversification. Additionally, over 80% of S-REITs have properties overseas.

Many investors like to buy Singapore REITs for the comparatively resilient income stream they provide. Compared to government bond yields and fixed deposit rates, S-REITs have more attractive dividend yields.

* Source: Bloomberg, SGX Research, data as of March 31,  2022. 

Even the Straits Times Index (STI), which is closer in risk profile to S-REITs, has a lower 12-month average dividend yield (2.9%) as compared to S-REITs.

For Syfe REIT+, which tracks the iEdge S-REIT Leaders Index made up of the 20 largest and most liquid S-REITs, the average projected dividend yield for 2022 is 5.5%.

* Source: Bloomberg, Syfe, data as of March 31, 2022. 

Which Singapore REITs should investors buy now? 

When it comes to investing, the old saying still holds true – don’t put all your eggs in one basket. For instance, retail and office REITs were among the worst performers of 2020, but rebounded significantly in 2021. This underlies the difficulty in picking “winning” sub-sectors. Instead, a broad-based investment in different segments like retail, office, industrial, hospitality and healthcare is more likely to weather any potential headwinds.

How does Syfe REIT+ compare with Singapore REIT ETFs?

Syfe REIT+ holds 20 of the largest Singapore REITs such as CapitaLand Integrated Commercial Trust, Mapletree Commercial Trust, Ascendas REIT and more. The portfolio tracks the iEdge S-REIT Leaders index and was launched in partnership with SGX.

When you invest in the Syfe REIT+ portfolio, your funds are used to buy all 20 REITs. In essence, you get to own actual units of these REITs. This is different from a REIT ETF where your funds are used to purchase that particular ETF – itself a product that is traded on the SGX.

If you’re looking for an efficient yet low-cost S-REIT portfolio, Syfe REIT+ stacks up better than REIT ETFs:

  • Diversified portfolio with minimal tracking error, lower costs and better liquidity 
  • No brokerage fees
  • No minimum investment amount
  • Automatic dividend reinvestment, dividend reinvestment can add 0.4-0.5% to annual returns. 

With Syfe REIT+, your dividends are automatically reinvested for you – at no extra charge.  Automatic dividend reinvestment is not available with a REIT ETF. 

Based on Syfe’s calculations, dividend reinvestment can add an additional 0.4% to 0.5% in returns for you each year. This almost covers Syfe’s tiered fees of 0.4% to 0.65%!

If you invest in a REIT ETF, you will need to take your dividends and reinvest them on your own. This counts as another transaction, so brokerage fees are again payable. 

Can investors DCA with Syfe REIT+?

Absolutely. The REIT+ portfolio is designed to let you buy Singapore REITs with a flexible monthly investment plan. With no minimum investment amount, the portfolio could be a good option for investors who are looking dollar cost average effectively into the Singapore REIT market.

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