Complete guide to Singapore REITs
Singapore's REIT market has been hit by higher interest rates, but that headwind seems to be dissipating. Estimated reading time: 33 minutes
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If you’ve ever strolled along Singapore’s Marina Bay, you will have noticed the dozens of office towers that dominate the skyline. You may not know that many of these towers are owned by real estate investment trusts (“REITs”) that you can purchase directly on the Singapore Exchange.
The benefits of REITs is that they’re liquid, less volatile than stocks and also offer tax benefits compared to owning stocks.
Since 2022, Singapore’s REIT market has performed poorly. The iEdge S-REIT Leaders Index is down roughly 30% from its 2019 peak despite the fact that Singapore remains one of Asia’s most dynamic economies.
The main reason for this poor performance is the current high interest rate environment. But now that the Federal Reserve is turning dovish, it’s possible that global interest rates will finally start coming down.
In this post, I will dig into the Singapore REIT (“S-REIT”) market, explain how it functions and also discuss the longer-term outlook for some of the 42 REITs listed on the Singapore Exchange.
Table of contents
1. How Singapore REITs work
2. Picking the right REIT
2.1. Sector exposure
2.2. High-quality assets
2.3. Decent sponsor
2.4. Low gearing ratio
2.5. Low valuation
3. The S-REIT market in mid-2024
4. The investable universe of REITs
4.1. Office
4.2. Retail
4.3. Hospitality
4.4. Industrial
4.5. Data center
4.6. Health care
4.7. Diversified REITs
5. Conclusions1. How Singapore REITs work
The first real estate investment trust (“REIT”) ever created was the American Realty Trust in 1961. This vehicle enabled investors to pool their resources to buy income-producing properties.
In Asia, it was only in the late 1990s that regulation was introduced to allow for a local REIT industry － first in Japan and then in Singapore.
In 2002, the CapitalMall Trust made a splash as the first REIT in Singapore. It was seeded with three shopping malls, including the Funan IT Mall close to City Hall. And in the following five years, a whopping 20 REITs were listed on the Singapore Exchange, becoming the hottest new asset class.
While the popularity of REITs has cooled down a bit, they remain a focal point for local investors seeking high-yielding assets.
Today, Singapore has the second largest REIT market in Asia, 42 REITs listed and with an aggregate market cap of US$72 billion.
So what is a REIT? An equity REIT holds a portfolio of income-generating property assets, say office towers in Marina Bay. Over 90% of the income from these properties are paid out as dividends to investors, and as long as that’s the case, the income is not subject to any corporate tax.
The terminology in the Singapore REIT market is different than for stocks, and also differs from the language used in the US REIT market. Shares in a REIT are called units and investors are called unitholders. Dividends are called distributions. And dividends per share are called distribution per unit, or “DPU”.
For American REITs, the key metric to track is the Funds from Operations (“FFO”). But in Singapore, REITs will disclose a metric known as Net Property Income (“NPI”), which is defined as the rental income after all operating expenses but before financing costs:
Net Property Income ("NPI") = Gross Revenue - Operating ExpensesUnder Singapore law, REITs are not allowed to engage in property development. In the past, a maximum of 10% of the asset value could be invested in “greenfield” (=new) projects. Today, if you include redevelopment of existing properties, then the limit goes up another 15 percentage points to 25%.
But still, these limits mean that organic growth is hard to come by. The only way that REITs can really grow is through acquisitions, which can be costly since they’ll be forced to issue new units or take on further debt.
The largest REIT markets in the Asia-Pacific include Japan and Australia. Newer REIT markets include Malaysia, Taiwan and more recently even India, the Philippines and China.
Most of Singapore REITs have at least some international exposure. Part of the reason is that the local property market is small. 70% of Singapore’s Central Business District Grade A office stock is already owned by REITs and developers, so local REITs have been forced to look abroad for growth. That is not the case in other REIT markets.
Unlike in the United States and Australia, however, Singapore REITs tend to be managed by external parties such as Keppel Land or CapitaLand. These sponsors tend to own 20-30% of the REITs themselves, and also help with managing the assets and making acquisitions on their behalf.
Managing an asset is straightforward. The sponsors will lease out properties to tenants, do marketing events and promotions, and also take care of the physical property through maintenance. In some cases, they’ll undertake “asset enhancement initiatives”, which is a fancy way of saying refurbishment of an old building to improve rents. A typical fee for such services would be about 3% of gross revenue on top of extra fees for the CEO’s office.
Sponsors will also help the REITs identify new investments, arrange financing, etc. Typical acquisition fees are around 1% and divestment fees can be additional 0.5%. Technically, the advisory services will be done in a separate entity from the manager, but in almost all cases, they belong to the same entity.
Finally, you have the so-called trustees, who act on behalf of unit holders and safeguard their interests. They make sure that the property deeds are accurate and the rentals enforceable, charging another 0.1% of the asset value for this service.
If you think this structure is unnecessarily complex, I tend to agree with you. But it’s to safeguard the interests of unitholders in a structure where an external manager has its own incentives to grow the asset base and the fee income it can derive from it.
Unitholders are protected by laws that restrict the power of the sponsor. Any transaction above 5% of net asset value has to be approved by unitholders. Managers can be removed with a simple majority vote. Valuations of the assets are also done externally every year through an independent third party to make sure the values are fair.
Okay, so why would anyone buy a REIT? In my view, the main attractions are that:
They’re a liquid and straightforward way to gain exposure to real estate assets with minimal transaction costs.
They tend to have lower volatility than the market as a whole, with an overall market beta of 0.64x. Though be aware of highly leveraged REITs as they may be forced to issue new shares at rock-bottom prices. It’s happened before.
Some investors have a preference for high yielding assets, perhaps in an effort to meet periodic cash obligations.
There are tax benefits. Singapore REITs that pay out more than 90% of their income do not have to pay corporate tax. Singapore residents who receive distributions from a REIT are not subject to any tax, whereas rental income from a fully owned property is. Meanwhile, non-resident unitholders currently enjoy a concessionary withholding tax rate of just 10%.
Given the fact that they offer high and stable yields, they’re frequently seen as bond proxies whose value fluctuate with the overall interest rate environment.
On the other hand, with external management, there are clear conflicts of interest and the layers of fees that some view as excessive. There’s also limited scope for growth when REITs are unable to grow organically through property development.
But some REITs are definitely better managed than others, and I’ll now discuss how to identify those.
2. Picking the right REIT
2.1. Sector exposure
The types of REITs on offer include retail (shopping malls), hospitality (hotels), offices, industrial properties, data centers and healthcare (hospitals). There are also a number of diversified REITs which own a variety of assets, frequently because those assets are mixed developments with both retail and office space within the same building.
The market is evenly divided between these categories, except healthcare and data center REITs, which remain more niche due to the limited supply of such properties:
You can also acquire diversified exposure through S-REIT ETFs such as the Lion-Phillip S-REIT ETF (SREITS SP - US$324 million) and the CSOP iEdge S-REIT Leaders Index ETF (SRU SP - US$52 million) which provide broad exposure to a range of REITs. Though bear in mind that they add additional fees, charging about 60 basis points annually for the service.
So which sector exposure is better? It depends on the outlook for each sector, and the extent to which the underlying assets are of high quality or not.
2.2. High-quality assets
In my view, a REIT should own assets that are irreplaceable and highly sought after by tenants.
Several factors go into the calculus. For example, an asset might have a great location, say, in close proximity to certain landmarks. A shopping mall might have a reputation, for example as Lucky Plaza has in the Filipino community. The overall ambiance might add to the attractiveness of an asset. Proximity to public transport helps. The vintage of the asset is also important, since it’ll require less maintenance capex to remain modern. And an attractive anchor tenant can also improve the status of a property.
One way to quantify the quality of an asset is by looking at the tenant turnover. If tenants are rapidly churning, that might mean they don’t value what the property brings to the table. A high overall occupancy rate means that it’s easy to find tenants. And finally, stable or rising rents suggest that tenants are willing to pay up for the space.
2.2. Positive supply & demand outlook
Properties are commodities. For example, a floor in an office building can easily be replaced by another. So, even trophy assets can and will be affected by fluctuations in the supply and demand for a particular asset class.
On the demand side, there’s often a secular trend overlayed by cyclical forces. That’s especially true for office and industrial real estate, whose tenants will suffer in recessions and can be easily substituted whenever contracts run out.
Meanwhile, the supply will depend on the animal spirits of investors. If the replacement cost of an asset is lower than transacted prices, developers will be tempted to build more, causing potential oversupply 3-4 years down the line.
Tracking coincident indicators such as vacancy rates, spot rents and tenant profitability can help spot longer-term trends. Then you can also look at leading indicators such the yearly new supply coming online compared to historical levels. If the net take-up doesn’t absorb all that new supply, then rents will have to fall.
2.3. Decent sponsor
As I mentioned earlier, Singapore REITs are special in that they’re all externally managed. That introduces a conflict of interest since the external manager will have an incentive to grow the asset base and collect transaction fees as well as a larger base for future management fees.
The extent to which sponsors “play the game” differs greatly. Some sponsors truly do care about unitholders, being reluctant to engage in yield destructive acquisitions. High-quality sponsors can also engage in asset enhancement initiatives, especially in retail REITs where the upside in yields from refurbishment can be substantial.
I suggest looking at the track record of a particular sponsor across all the REITs that it manages. Behavioral patterns tend to repeat. You can look at the historical share dilution. I tend to prefer little to no dilution at all. You can look at whether the acquisitions have been done at attractive cap rates - unlikely, but it’s possible. You can also look at the trends in the distribution per unit and net asset value per unit. Ideally, they should go up over time. Just be mindful that in Singapore, properties are accounted for at fair value. So, a rising net asset value per share can also be due to a boom or even a bubble in a particular class of property, causing rising prices for comparable transactions to drive up fair value estimates. Trends in the distribution per unit should be more reliable in assessing whether a sponsor is shareholder-friendly or not.
2.4. Low gearing ratio
Under Singapore law, a REIT is unable to take on more than 45% gearing (=leverage), which is defined as total borrowing divided by total assets. Most REITs are below this limit at a 38% average. But some are getting close to it. That makes S-REITs different from, say, Japan and the United States, where such gearing limits do not exist.
The Monetary Authority of Singapore recently proposed to increase the limit to 50% along with minimum interest coverage ratios of 1.5 times.
On the surface, the 45% gearing ratio limit doesn’t seem excessive. Properties are perfect for adding on leverage since banks tend to feel comfortable with them as collateral. However, the 50% gearing limit makes it difficult for REITs to compete with private equity companies to acquire assets. And with less leverage, returns to unitholders will be lower.
The other problem has to do with reflexivity. If a REIT hits its gearing ratio, it may be forced to deleverage by issuing shares at the wrong moment. That’s exactly what happened during the Great Financial Crisis of 2008, when the overall Singapore REIT index dropped by 75%. Many of the REITs were leveraged going into the crisis, with several hitting the regulatory limit and being forced to deleverage as fair values came down with lower market prices. A
In other words, high leverage, therefore, introduces reflexivity, with low prices potentially begetting even lower prices if a REIT is forced to raise equity in a crisis. REITs in Australia and Japan are less likely to suffer this fate since they’re not constrained by gearing limits.
But even if you disregard the risk of exceeding gearing limits, studies have shown that REITs with lower leverage tend to outperform. So I would make sure that the interest coverage ratio exceeds, say, 3x and that the gearing ratio does not exceed, say, 40%. You can also look at credit ratings to understand how vulnerable a REIT is to, say, interest rate movements or currency movements if the debt is denominated in a different currency than the assets.
2.5. Low valuation
In theory, you can value a REIT using discounted cash flow analysis (“DCFs”). But in a DCF, the assumptions can swing the target price massively. And who is to say that a discount rate of 5% or 8% is appropriate for any given REIT?
In the United States, many investors focus on price/fund from operation (P/FFO), which is net income excluding depreciation. In Singapore, on the other hand, since REITs pay out more than 90% of their income, investors typically use the distribution yield, or trading yield, as a heuristic to value REITs.
REIT investors will typically demand a premium to government bond yields to account for the risk of vacancies and fluctuations in rents. In the United States, the yield spread to the 10-year government bond has historically been around 2.6 percentage points. In Singapore, the 10-year government bond yield is currently 2.7%, which means that investors should probably require REITs to trade at somewhere above 5.3% yield.
Trading yields can be misleading if rents are above current spot market rents, which will then inevitably lead to lower rents in the future. This phenomenon is known as “negative rental reversion”. Trading yields can also be misleading if a REIT is highly indebted or about to lose a major tenant.
You can also look at net asset values. Since properties are valued at fair values based on comparable transactions, the Price/Book of a particular REIT will reflect the discount to recent transacted values. However, since they rarely buy back shares or divest assets, there’s nothing that says that a REIT will necessarily rise to 1.0x book. Meanwhile, a low price/book means that it will be more difficult for the REIT to grow through yield-accretive acquisitions.
Finally, you can look at the replacement cost of a set of buildings. Look at land values, the construction cost, interest expense and developer profits to understand whether the properties owned by a REIT are undervalued. I think such analysis is particularly important in inflationary environments when construction costs are rising rapidly.
Since growth is hard to come, normalized yields is what truly matters. And to understand normalized rents, we need to make estimates of where rents are going and then capitalize them at a cap rate somewhere north of the 10-year government bond yield. That’s the approach that I personally favor.
3. The S-REIT market in mid-2024
Singapore’s monetary policy is linked to that of the United States through its managed float currency system. The Singapore Dollar is allowed to fluctuate in a narrow band against a basket of currencies, of which the US Dollar is the most important. That means that if US interest rates rise, Singapore will need to follow suit to avoid unwanted currency depreciation.
That’s exactly what’s happened in the past two years. As the Fed Funds rate rose from zero to 5.25%, Singapore’s short-term rates have risen to 3.6%. These higher rates have caused the value of Singapore government bonds to decline. And bond proxies such as real estate investment trusts have also suffered.
The are two reasons why REIT prices have dropped. First, the valuations of underlying properties tend to decline as property becomes less attractive compared to bonds. Second, REIT interest payments will go up, causing distributable cash flow to decline.
Singapore’s broader REIT indices are down about 25% since 2019. And the underperformance is even greater if you compare it to Singapore’s Straits Times Index.
If you compare the valuation levels with book values, which are derived from fair value estimates, Singapore REITs now trade at a 17% forward discount － an unusual situation in a historical perspective:
The yield spread against the 10-year government bond yield is currently about 3.5%, slightly below the average. So rate cuts have to some extent already been priced-in.
The absolute trading yield of about 6% is in line with the historical numbers, as you can tell from the chart above. But on a sector basis, office REITs are trading at a high yield of 7.7% while the other sectors are trading more in line with their historical levels.
So why are office REITs yielding this much? Because the office vacancy rate has gone up, spot rents are now down and investors are expecting negative rental reversions. Meanwhile, retail rents have improved thanks to greater tourism to Singapore. And factory / warehouse rents have held up better than expected.
Let’s now dig into the drivers for each of the S-REIT sectors one by one.
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4. The investable universe of REITs
4.1. Office
Singapore’s office REITs own either top-quality “Grade A” buildings, or lower quality “prime” buildings. Grade A buildings tend to be in more scarce supply, so will be more able to keep occupancy rates high throughout the cycle. Prime buildings can be seen as commodities.
In the 1970s, the early international companies that set up base in Singapore were American, including HP, Fairchild Semiconductor and Exxon Mobil. That was followed by a wave of Japanese companies expanding to Singapore in the late 1980s and 1990s. In the 2000s, we saw a larger number of European banks, asset managers set up shop.
More recently, we’ve seen Chinese tech companies moving to Singapore as part of efforts to rebrand themselves and to maintain access to Western markets. And private banks are expanding rapidly in Singapore and Chinese capital is seeking a safe haven after recurring private sector crackdowns.
Today, the tenants in Singapore’s top office buildings tend to be professional services companies such as banks, insurance companies, lawyers, consulting firms, accounting firms, commodity trading companies, etc. Non-customer facing employees tend to work in business parks instead where rents can be about half the price of the Central Business District.
A high quality office building tends to have a great location, has been built recently to high standards and close to the Singapore’s Mass Rapid Transit system. For example, the Marina Bay area and Raffles Place are typically considered the best locations for banks to be located.
Office rents tend to be volatile across the cycle, having almost halved during the Great Financial Crisis when companies felt compelled to downgrade their footprints to save on costs. However, Grade A rents of SG$12 per square foot are still competitive vs Grade AAA Hong Kong office rents of HK$130, equivalent to roughly SG$22.
This cyclicality may have lessened over time. One potential reason is the 2011 regulation that made it more difficult for companies to hire foreign nationals. Since then, Singapore’s population growth has decelerated from over 2% to less than 1%.
Another factor is the new supply, which reached 2.5 million per year from 2008 to 2013, came down towards 2019:
The supply situation has been negative recently, with major new supply coming from buildings like IOI Central Boulevard in the Marina Bay area (1.2 million square feet), Keppel South Central in Tanjong Pagar (0.6 million square feet) and Shaw Tower (0.4 million square feet). There will be further bumps in 2027 and 2028 with 1.5-2.0 million square feet per year. CBRE recently said that the island-wide vacancy rate has crept up to 10.8%, partly due to layoffs in the tech industry but also due to this new supply.
What’s odd about the sector is that Grade A office space transacts at 3.4-4.0% cap rates, way below the 6.7% trading yield for Singapore’s largest pure-play office REIT, Keppel REIT (KREIT SP - US$2.6 billion). That means that it would be hard for it to make yield-accretive acquisitions. In other words, you should not expect any growth in the distribution per unit.
But what’s even more concerning is that if asset values drop say 30% to a 5.3% cap rate, then the gearing ratio of Keppel REIT would exceed even the proposed 50% limit. The new incoming supply adds is another question mark when the office market already seems a bit oversupplied at the current 10.8% vacancy rate.
Keppel REIT is down roughly 27% since 2019 and now trades at a 6.7% yield:
Its assets, including Marina Bay Financial Centre, Ocean Financial Centre, etc are fantastic. That said, I am nervous about potential drops in the value of office real estate that would cause the gearing ratio to one day exceed the 50% limit and thus lead to forced issuance of new units. That said, Keppel REIT should benefit from a decline in interest rates from the current high level.
4.2. Retail
Singapore is a shopping mecca. However, the tropical climate means that most shopping takes place indoors, specifically in large-scale shopping malls. There are no other options.
There are two types of mall ownership: strata-title and single ownership. In the former case, the malls are collectively managed by the shop owners. Examples of such shopping malls include Lucky Plaza, Sim Lim Square and Far East Plaza. Single ownership malls tend to be owned by REITs, and include malls such as Plaza Singapura and Paragon Mall.
How can you tell whether a retail property is high quality or not? If its occupancy rate is low, then the mall might be having difficulties attracting customers. You might also be able to get data on foot traffic. A high tenant turnover rate might also signal that shops are finding it difficult to survive.
The retail REITs will typically charge base rents on top of a variable portion based on the gross turnover of each shop. This enables them to understand get data on tenant revenues and make sure that rents are appropriate.
A key metric to track is the occupancy cost, which is calculated as the rental / sales ratio for shops operating within the mall. Paying 16-18% of their sales in rent is seen as reasonable. Supermarket anchor tenants will typically pay less in rent since their margins are low. But on the other hand, they help bring in customers to the mall. In any case, if the occupancy cost is way beyond the 16-18% number, there might not be much upside to rents.
Out of all the REIT categories, retail REITs tend to have the greatest upside from asset enhancement initiatives. For example, they might upgrade the tenant mix into a hotter, newer stores. Or rebuild shopping malls to make them more attractive to consumers.
Today, there are about a 100 malls in the city with an aggregate retail space of 67 million square feet. In the past, most malls were in the Orchard Road district, but today, satellite towns such as Jurong and Tampines have got their own major shopping malls that are on par if not better than their Orchard Road counterparts.
The per capita retail space of 12 square feet doesn’t seem excessive compared to Hong Kong’s 16 and the United States’ 57. And the supply growth seems reasonable.
Singapore’s overall retail sales have been flat since the pre-COVID period － despite the inflationary pressures experienced in 2020 and 2021 and despite strong inbound tourism.
The data for this index is taken from surveys of retail establishments and does not seem to include spending on e-commerce. I think that’s why we’ve seen pressure on retail rents over the past few years, not only on Orchard Road but also in the suburban areas of the city:
The exact e-commerce penetration rate is hard to estimate, but I’d imagine it’s somewhere in the mid-teens. Third-party research companies seem to estimate spending on e-commerce growing around 11% per year, so I think the headwinds from e-commerce are still there.
The biggest retail REIT in Singapore is Frasers Centrepoint Trust (FCT SP - US$3.3 billion), which owns a range of shopping malls, including Northpoint, Causeway Point, Hougang Mall and stakes in NEX and Waterway Point. Then you have Paragon REIT (PGNREIT SP - US$2.0 billion), which owns Paragon Mall, Clementi Mall and retail assets in Australia. Finally, Starhill Global REIT (SGREIT SP - US$854 million) owns Wisma Atria and Ngee Ann City, along with a whole host of assets across Asia-Pacific. Singapore’s other retail REITs are exposed to other countries, such as China, Indonesia, and the United States.
Fraser Centrepoint Trust is down 13% since 2019, Paragon REIT 17% while Starhill Global REIT is down 33%:
I’m unlikely to write about either of these stocks. E-commerce remains a headwind, and the distribution per unit is likely to stay flat at best. From that perspective, 5% trading yields do not seem particularly high. That said, Fraser’s Centrepoint Trust has the best historical track record in terms of DPU growth.
4.3. Hospitality
Hospitality REITs tend to be more volatile than other REITs. Hotel occupancy rates will vary across the cycle, and can go down significantly during extreme periods like the COVID-19 pandemic or during terrorist attacks as 9/11. Room prices can also be volatile, and ultimately determine how much a REIT can charge for its property.
The key driver of Singapore’s hospitality industry is inbound tourism. The number of inbound tourist arrivals hasn’t yet recovered to the pre-COVID level, but it’s getting closer. Singapore recently introduced visa free travel for Mainland Chinese. So far, this visa program hasn’t been as successful as originally anticipated. But then the potential for Indian and Southeast Asian tourism to Singapore remains strong.
It’s not just leisure travel that’s driving the hospitality market. They also benefit from the meetings, conferences and exhibitions industry (“MICE”). Singapore has excellent flight connections and is a natural choice for conferences with international participants. Roughly 25-30% of visitors to Singapore have historically been for MICE-related activities.
The industry does seem to be oversupplied, with about 73,000 hotel rooms today compared to just 35,000 in 2007. While the number of inbound tourist arrivals has grown, it hasn’t doubled. There’s been a hope that the number of days spent by visitors would go up from the current four days, but there’s been no trend in that direction yet.
The health of the underlying properties is best measured through the metric RevPAR, revenue per available room, which is calculated as the product of the average daily room rate and the occupancy rate for each hotel:
RevPAR = (Average Daily Rate) x (Occupancy Rate)On RevPAR, Singapore hotels have been doing just fine coming out of the COVID-19 pandemic, exceeding the pre-pandemic level by some margin.
Hospitality REITs tend to enter into long-term master leases with price escalation clauses enabling them to hedge against inflation. There will typically also be variable components, with the REIT sharing some of the upside if RevPAR surprises to the upside. However, the quality of the master lessee is important, as the skill of a hotel in bringing in customers is just as important as the property itself.
Given that hospitality rents tend to be volatile across the cycle and that ~10% capex is needed to maintain hotel rooms in shape, hospitality cap rates tend to be higher than for most other property types. And that goes for trading yields as well.
The only pure-play Singapore hospitality REIT is the Far East Hospitality Trust (FEHT SP - US$976 million), which owns two Oasia-branded hotels, several Village-branded hotels and a number of boutique hotels and serviced apartments. Meanwhile, CapitaLand Ascott Trust (CLAS SP - US$2.6 billion) is focused on serviced apartments under the Ascott, Somerset, Quest and Citadines brand names. CDL Hospitality Trust (CDREIT SP - US$873 million) owns a large number of hotels in Singapore including Orchard Hotel, Copthorne Waterfront, M Hotel as well as hotels in the UK, Australia, Japan, etc. Finally, Frasers Hospitality Trust (FHT SP - US$629 million) owns Intercontinental Singapore, Fraser Suites Singapore and many other assets in the UK, Australia and elsewhere.
Far East Hospitality Trust has been the clear outperformer, down just 4% since 2019. The other larger hospitality REITs are all down 30-43% over the same period.
Gun to my head, I’d probably write about Far East Hospitality Trust, since it hasn’t diluted unitholders much historically, has lower leverage and also owns decent new hotels like Oasia in Tanjong Pagar. I don’t know much about CDL Hospitality Trust, but it appears to have an upside in the distribution per unit. In any case, the hospitality REIT sector continues to benefit from higher inbound tourism, a long-term secular trend, and trading yields that remain quite attractive.
4.4. Industrial
Singapore’s industrial REIT sector has been hot, but I don’t fully understand why. The properties these REITs hold are typically flatted factories (multiple units stacked on each other), warehouses, high-spec industrial buildings and business parks.
A simple warehouse or a flatted factory are easy to build, and they, therefore, exhibit cycles of excess supply. A high-end business park rented by a multinational corporation, on the other hand, tends to be a stronger asset that is more on par with office properties.
Most of Singapore’s industrial REITs were formed by acquiring assets from government-owned Jurong Town Corporation, the holding company for the Economic Develompent Board. These industrial estates have thus been privatized.
That said, to call them “assets” might be a misnomer. In Singapore, most industrial properties are not freehold but rather 30-60 year leasehold that depreciate 2-3% per year. And if you add leverage on top, the equity literally becomes a melting ice-cube.
Singapore’s manufacturing sector has been under some pressure due to competition from Japan, Taiwan, South Korea and China. The high wages make it difficult to compete for lower-end services, while some high-value add sectors such as semiconductor fabrication continues to grow. The e-commerce industry has added demand for warehouses, providing a saving grace for an otherwise competitive sector.
Just like for office REITs, the volatility of rents across the cycle can be massive. For example, after the Asian Financial Crisis, the vacancy rate for industrial properties shot up by 30% vs just 10% for Singapore’s shopping malls.
Today, the supply situation looks challenging, with 1.9 million of new supply coming on-stream in 2024, far outstripping demand.
The most high-profile industrial REIT is the CapitaLand Ascendas REIT (AREIT SP - US$9.6 billion), which has a US$17 billion portfolio across Singapore and other developed markets. Mapletree Industrial Trust (MINT SP - US$5.2 billion) has an almost as large of a footprint of business parks, factories and industrial buildings across Singapore and North America (data centers). These and most other industrial REITs have performed nicely since 2019, and the top two now trade above book.
Knowing that Singapore industrial properties trade at exceptionally high cap rates of 6-8%, presumably because they’re 30-60 year leaseholds, I don’t see why buying a REIT at 5-6% trading yield should be considered attractive.
4.5. Data center
Data center REITs provide real estate for tech companies storing servers and network equipment used to store and transmit data. These buildings tend to have advanced cooling systems that require a significant amount of electricity.
The demand for data is going up as we become increasingly connected. Singapore is perfect for data centers given its proximity to subsea cables. The city itself also has excellent high-speed fiber connections and a reliable power grid. Further, the risks of earthquakes and tsunamis are minimal.
A major risk with these properties is the default of a customer. Contracts tend to be short-term, around 2 years and will have to be rolled over. REITs will typically not disclose who their main customers are. Hyperscalers seem to be better customers, but these are also large enough to build their own data centers. Smaller customers are losing market share to the hyperscalers, and the data center REITs are squeezed in between. That said, in Singapore, data center vacancy rates remain low, and the listed REITs have not had a major impact from customer defaults. Electricity prices have also not been much of a worry yet.
The most popular data center REIT in Singapore is the Keppel DC REIT, with over half of its exposure to the city. The Keppel DC REIT (KDCREIT SP - US$2.8 billion) has risen +18% since 2019, while Digital Core REIT is down almost 50%.
The historical distribution per unit growth has been impressive at 7.2%. However, from my understanding, there was a moratorium on new data center development from 2019 to 2022, leading to constrained supply. I’m guessing this tightness in supply won’t last forever. For that reason, I would not extrapolate that 7.2% number.
4.6. Health care
Healthcare REITs are strange animals. They typically lease out assets to hospitals or clinics on a “triple net basis”, which means that the tenant takes care of all property operating expenses, taxes and insurance.
Their tenancy agreements tend to be long-term in nature, say 15 years and subject to potential renewals. And in those contracts, there will typically be automatic inflation adjustments. Just like for shopping malls, there also tends to be variable components taking a percentage of the revenues of the hospital.
Compared to office REITs, healthcare REITs tend to be stable. Demand for health care remains strong across the economic cycle. On the other hand, it will be difficult for them to grow, other than through acquisitions. So out of all the REIT categories discussed so far, health care REITs are probably most like bonds. With an added kicker if medical tourism to Singapore continues to grow.
The only real risk is counterparty risk. However, Singapore hospitals tend to be highly profitable thanks to contributions from private insurance plans. Given the tenant concentration, there can be conflicts of interest, with the tenant, in some cases, holding greater bargaining power.
The only pure-play healthcare REIT in Singapore is Parkway Life (PREIT SP - US$1.7 billion), which owns Gleneagles Hospital, Mount Elizabeth Hospital and Parkway East Hospital on top of several other assets overseas. The question mark with this REIT is that the sponsor is IHH Healthcare (IHH MK - US$13 billion), the same company that runs both Gleneagles and Mount Elizabeth. That means that a large part of Parkway Life’s business is based on related party transactions. While the trading yield is only 4.0%, the distribution per share has been 3.2% per year, which i would consider to be reasonable. Its assets are also top-notch, without a doubt.
Singapore-listed First REIT (FIRT SP - US$418 million) is backed by the controversial Riady family’s Lippo Group and has large exposure to Indonesia. Development arm Lippo Karawaci has experienced significant debt problems, and might be tempted to steal assets from related parties to survive.
The difference in quality between these two REITs is evident from the performance, with Parkway Life up +19% and First REIT down 71% over the past five years.
Parkway Life trades at a tight trading yield of 4.0%, which is poor but perhaps acceptable given the stability of the assets.
4.7. Diversified REITs
On top of the above REITs, you’ll also find a set of diversified REITs to choose from, some of which enjoy massive scale. The diversified REITs typically have exposure to both office and retail properties.
The CapitaLand Integrated Commercial Trust (CICT SP - US$11 billion) is perhaps the most blue chip of any REIT in Singapore, owning Grade A office buildings Asia Square Tower 2, CapitaGreen, as well as several high-quality malls such as Plaza Singapura and Funan Mall. MapleTree Pan Asia Commercial Trust (MPACT SP - US$5.3 billion) owns VivoCity and other retail, office and business park assets. Frasers Logistics & Commercial Trust (FLT SP - US$3.1 billion) owns industrial and commercial properties in Australia and elsewhere. A smaller alternative is the Suntec REIT (SUN SP - US$2.7 billion), which owns the Suntec office property complex along with the associated mall, as well as parts of Marina Bay Financial Centre 1 & 2 and properties in the UK and Australia. OUE REIT (OUEREIT SP - US$1.2 billion) owns several office towers in the Central Business District but is connected to the Lippo Karawaci Group.
Most of these stocks are down about 10-50% since 2019, with most of that underperformance since 2022, when interest rates started rising.
The one I’m personally most interested in is the CapitaLand India Trust (CLCT SP - US$884 million), which owns business parks throughout India. It yields 6.7% and trades around book value. It’s grown its distribution per unit at a 3.3% rate in Singapore Dollar terms, which to me suggests that the currency risk and dilution risk is manageable. It helps that the REIT is down about 20% since 2019, suggesting that there is some recovery potential.
5. Conclusion
Thanks for reading all the way to the end. This was was meant to be as complete of a guide to the Singapore REIT market as possible, to educate and to think about the opportunity set.
Investors buy REITs for the yield. I’d consider them to be decent alternatives to bonds, especially if you choose the ones with high-quality assets, little to no dilution and okay trading yield. The ones that fit this profile are Far East Hospitality Trust (FEHT SP - US$976 million), Parkway Life (PREIT SP - US$1.7 billion) and CapitaLand India Trust (CLCT SP - US$884 million). The sector that I find the most exciting is probably the hospitality REIT sector, given continued inbound tourism to Singapore and the fact that the REITs take part in some of the upsides.
But at the end of the day, REITs are financial products. Leverage and potential dilution are constant worries. The contrast with Hong Kong property companies is massive, as those tend to trade at large discounts to NAV. While their dividend yields are not necessarily much higher, they do tend to reinvest capital, which can also help grow the asset base. I’ll be focusing more on Hong Kong property companies in the next few months, as I believe that the upside to intrinsic value is generally higher there. But hopefully, you learned something from this primer, anyway.
Hey Fritz great guide. Looking forward to the post about Hong Kong.
In what scenarios would you choose a REIT over a listed company whose principle business are real estate holdings? What are the key metrics that are different vs REITSs? Ie trading yield less important?
What do you think about using REITs/real estate businesses as a proxy for playing a rebound in investor enthusiasm for a particular market (for example HK and SG)
Could you give more details about calculating replacement cost?
Thanks !
Fantastic guide. Big question for me, as a US tax payer are S-reits PFICS? I think they are which would make them challenging to own