The last two weeks have seen the pricing of SGX-listed REITs fall by an average of 11% as a result of the US Federal Reserve implying that QE3 may be wound back gradually. However, SGX-listed REITs have continued to deliver strong returns in the last 2 years and until the sell off two weeks ago, SGX-listed REITs had performed strongly on a year-on-year basis.
Hot money and QE3
Many analysts believe that QE3 is responsible for hot money entering the Asian bourses and pushing prices higher, hence the Federal Reserve’s recent hints that QE3 might be scaled back causing the market to dip.
So-called hot money entering the markets and pushing prices higher is only part of the story. Investors are attracted to REITs as they offer better yield returns when many other asset classes are delivering low returns.
Why continue to invest in a Singapore REIT?
Global announcement of macroeconomic data will continue to produce very short-term price volatility – however overall sentiment for the sector remains favourable. Average returns of approx. 6% in the REIT sector compare very favourably to say 10-Year Singapore sovereign bonds which yield approx. 2%.
There are several catalysts present in the Singapore market in 2013 which point to upside opportunity that will continue to attract investors to the sector:
· The last 12 months has seen REITs reach 5-year highs – mainly off the back of investors seeking higher returns in a low interest rate environment. This year we see market catalysts keeping REITs attractive to investors. The Asia Pacific region is predicting the highest GDP growth in the world this year, and this coupled with high employment and strong consumerism, will generate more opportunities for continued growth of Singapore REITs
· Retail turnover figures remain positive, giving rise to expectations of sustained strong growth in the retail sector. Singapore hotels recorded amongst the strongest ADR growth rates from 2010-2012 and are forecasted to be largely stable thus offering high returns on hospitality REITs and business trusts. The office sector was sluggish in 2012 but has now seen two consecutive quarters of stabilized rents. Rent growth is now imminent in the CBD and Marina Bay areas meaning that office stocks will also be in favour as growth returns to the sector
John Stinson, Executive Managing Director, Capital Markets, Asia Pacific, Cushman & Wakefield Singapore comments: “Obviously the REIT sector will still be subject to short term pricing volatility as governments around the world respond to the need to stimulate their economies. If the US Federal Reserve eases Treasury bond buying it is likely to be very gradual. ‘Hot money’ in the market continues to be replaced by re-allocation of funds from Europe by sovereign wealth funds and large global investors. These factors will continue to be favourable for the REIT market in Singapore both for investors due to the returns available and for sponsors wishing to tap the markets for equity for new vehicles or issues.”
Singapore v. Hong Kong as a REIT destination
As a REIT destination Singapore’s attractiveness as the regional domicile continues to flourish. Total capitalization of the REIT sector on the SGX is over S$40bn. There are currently 38 investment trusts listed on the SGX, 23 of which are pure property owning vehicles, e.g. CapitaMall, AIMS AMP & Keppel REIT. The remainders are business trusts operating in the healthcare and hospitality sectors where the REIT owns the management operations and the properties themselves e.g. Ascendas Hospitality Trust, Croesus Retail Trust, etc.
As ever, Singapore faces strong regional competition from Hong Kong. Despite this Singapore continues to attract new IPOs including the recent announcement of SPH and OUE. Singapore retains its regional competitive edge for many reasons:
· REITs were established in Singapore in 2002, compared to 2005 in Hong Kong
· Conducive regulatory and compliance regime has made Singapore the preferred place to list
· Singapore has created tax breaks to encourage the listing of REITs, such as the waiver over tax on income generated by REITs, while in Hong Kong, REIT assets are taxed the same way as if they were owned by a company. Furthermore, with the creation of a regime for business trusts to list in Singapore (far in advance of Hong Kong) it has created a more dynamic ecosystem for such asset classes to thrive
· Hong Kong investors are more focused on capital returns, and consequently, sidelining steadier, profit-generating investments. Singapore REITs are also relatively more active in managing their asset portfolio, for example, engaging in asset enhancements initiatives and portfolio renewal to increase income and thus, have focused on creating accretive investment vehicles with defined long-term growth plans. By transferring assets into REITs with attractive terms attached, such as rental guarantees, it aims to create value for investors as opposed to a mere spinoff of assets.
Conclusion
John Stinson concludes: “Despite current profit taking in the REIT sector, we believe investor interest will continue to be very strong and valuations will be supported by improving conditions in the direct markets”.