Why Singapore REITs Stand Out In This Low Interest Rate Environment

Low interest rates aren’t going anywhere, at least until 2023. The US Federal Reserve has all but confirmed that it plans to keep rates near zero for the foreseeable future to help prop up America’s ailing economy.

This has direct consequences for interest rates worldwide. Investors can likely expect yields on government bonds to remain low, and interest rates on their savings accounts to remain depressed for the next few years. 

Against this backdrop, investors should consider Singapore REITs (S-REITs) as an alternative – and attractive – source of steady income. 

S-REIT fundamentals remain solid

Since March, the SGX iEdge S-REIT Leaders Index has rebounded 40%, handily beating the 11% recovery made by the Straits Times Index (STI). The former is an index holding 26 of the largest REITs in Singapore while the STI tracks the performance of the SGX’s top 30 companies.

Across sectors, industrial and healthcare REITs have outperformed, but retail, office and hospitality REITs are still down on a year-to-date basis.

Nonetheless, most S-REITs have remained financially stable. The gearing ratio of the REIT sector averaged around 36% as at 31 August 2020. This is despite MAS raising the leverage limit for S-REITs from 45% to 50% earlier in the year to help REITs better manage their cash flow. 

Some REITs have also announced expansion plans via acquisitions, which is a healthy sign. For instance, Mapletree Industrial Trust is acquiring a US data centre and office space while Frasers Centrepoint Trust will be adding popular malls like Hougang Mall, Tiong Bahru Plaza, Tampines 1 and more to its portfolio.

Most reassuring for investors is that many S-REITs are still paying dividends, although some have trimmed payouts to conserve cash. But overall, S-REITs still have significantly higher yields compared to government bonds. 

The average dividend yield of S-REITs is currently at 4.5%. Compare this to the benchmark 10-year government bond yield of 1% and the 12-month Singapore fixed deposit rate of 0.5%. For investors seeking income, it is clear that S-REITs are the better choice amid this lower-for-longer interest rate environment. 

Upside potential for the mid to long term

Over the past weeks, the retail and hospitality sectors have seen stronger performance as confidence returned. According to OCBC Investment Research, Singapore’s hospitality industry could see a “slow recovery” in the later half of the year. 

This comes as hotels were allowed to reopen for staycation bookings and Singapore moved to gradually re-open its borders. The signs are encouraging. Government contracts for hotel operators are likely to last through the third quarter while staycation demand has been strong. Some hotels have even repurposed existing areas into comfortable work spaces for employees seeking more conducive remote working arrangements.

To be sure, a full recovery for hospitality REITs is still a long while away. But with hospitality REITs now trading at attractive valuation discounts, they represent a potential opportunity for long-term investors. 

The outlook for retail REITs is likewise positive. Singapore malls are still the preferred destinations for families and couples on evenings and weekends. Although they were greatly impacted by social distancing measures in the early months, footfall and spending have returned as Singapore approaches Phase 3 of circuit breaker measures.

Don’t write off office REITs just yet

Work from home may have become the norm – for now – but office spaces will always be here to stay. Some companies want a prestige address in the Central Business District (CBD), some need an office for team meetings, and others may want to allow their employees the flexibility to choose between remote work and going to the office. 

A potential shot in the arm for office REITs could also come from the expansion plans of Chinese technology giants. Tencent, Alibaba, and ByteDance are reportedly looking to set up their regional headquarters in Singapore. These firms are likely to take up Grade A prime CBD offices, which may benefit office landlords like CapitaLand Commercial Trust or Keppel Reit.

It remains to be seen if companies will permanently reduce their office space once Singapore lifts all COVID-19 safety measures. But this new demand suggests that the fundamentals for office REITs may be stronger than investors think, especially since office supply is expected to remain moderate until 2022.

Which REITs should you choose?

With nearly 40 REITs listed on the SGX, which should you choose? And how can you be sure that the top performer you’ve picked continues to outperform in the months ahead?

Just like timing the market, consistently picking the right REITs to beat the market is an impossible feat. Instead, you’ll probably be better off investing in a diversified REIT portfolio with counters across all REIT sub-sectors. 

Think about it this way. You will be exposed to industrial and healthcare REITs, which have outperformed the past months. You will also be positioned to tap into the recovery of retail, office and hospitality REITs. If any one sector experiences an unexpected setback, your REIT investments in the other sectors will cushion the dip.

Why Syfe REIT+ could be the solution

One of the easiest ways to get a diversified REIT portfolio is through Syfe’s REIT+ offering. The portfolio holds 20 of Singapore’s largest REITs and tracks the performance of the SGX iEdge S-REIT Leaders Index.

In short, you’ll own high-quality REITs like Mapletree Industrial Trust, CapitaLand Mall Trust, Ascendas REIT, Keppel REIT and more, all within the REIT+ portfolio. It’s also an easy and affordable way for investors to gain Singapore real estate exposure. For one, there are no brokerage fees or investment minimums. If you’re planning to make regular contributions, REIT+ will be more cost effective than buying REITs through a broker.

With Singapore’s economy on the gradual upturn, S-REITs look promising both from a yield and price appreciation standpoint. If you’re ready to take advantage of this opportune time, explore Syfe’s REIT+ portfolio here.