SINGAPORE: For investors seeking an asset class that "fares more attractively than the average rental yield", Singapore Exchange's (SGX) head of research and products, Mr Chan Kum Kong, said Singapore real estate investment trusts (S-REITs) is an "interesting segment".
“If you were to compare REITs with the physical market for the average individual investors out there, your rental yield is probably in the range of about 3 per cent and on top of that you obviously have to pay tax, based on the personal income in bracket.
"And in the case of the dividend yield from REITs, it’s about 6 to 7 per cent and from a tax standpoint, it’s very efficient because it’s tax exempt for both local and foreign individuals,” he said.
Ms Alice Tan, Singapore director and head of consultancy and research at Knight Frank agrees with him, saying: “In an environment of low yields, investors are essentially looking out for stable and higher yields compared to the general equities market so Singapore REITs actually provide a good alternative source of investment where yields are perceived to be stable.”
REITs are securities that invest in a diversified pool of professionally managed real estate assets. They raise capital to purchase primarily real estate assets, usually with a view to generate income for unit holders of the fund.
SGX has said that like stocks, REITs have market risk – that is, unit prices can move against the investor’s expectations. It also noted that other risks associated with stock investing, such as price risk, volatility and liquidity risks also apply.
In a recent market report by the exchange, it said all 31 S-REITs have given investors an average total return of 17.6 per cent for the period spanning January to Aug 4 this year.
It also showed that total returns ranged from 8 per cent on the low end for Fortune REIT to 30 per cent on the highest end for CDL Hospitality Trusts.
Significant institutional investor interest in REITs over the last four months has brought cumulative inflows to S$133.6 million, it added.
The SGX REIT 20 Index - a market cap-weighted benchmark that measures the performance of the 20 largest trusts in the sector - generated a 18.8 per cent total return in the first 31 weeks of the year. That figure was up from a total return of 16 per cent for the same period last year.
Mr Chan said: “The next stage in terms of growth would definitely be more overseas assets coming in. I think the platform is recognised, there is a lot of interest from investors and from the issuers’ standpoint, they are looking to tap this platform in terms of recycling of capital.”
RETAIL REITS VERSUS RISE IN E-COMMERCE
On the impact of e-commerce on retail REITS, Knight Frank's Ms Tan said: “Retail REITs, especially those that have suburban malls in Singapore, do seem to have a better short-term potential of maintaining their dividend yields as these malls are able to catch a stronger and stable catchment of shoppers. The challenge that they face could be elevated asset prices.”
However, she said that the rise of e-commerce has proved to be a plus for those betting on the higher demand for warehouse space that is indispensable for the growth of online retailing.
"As e-commerce changes, the need for centralised storage of goods and deployment of goods to households and individuals are becoming more (important) than before. Industrial could become the new retail."
As for hospitality REITs, Knight Frank said the sector needs to explore new ways of offering their accommodation packages - citing the prevalence of shorter expatriate terms and business engagements in Singapore.
Meanwhile, on the office front, OCBC remains optimistic that rents will bottom out going forward, but acknowledges that risks still remain.
Mr Andy Wong, investment research analyst at the bank, said: “In near term, there could still be some pressure on rentals and occupancy since there is still relatively ample amount of supply that's coming on-stream for the second half of 2017.
“In terms of demand ... we've actually seen more inquiries on the ground, but whether that will actually translate to actual lease signings will ... depend on the global economic recovery.”
Ms Tan said the “global economic recovery” will give the office market a much needed boost.
“The office market could ride on this strong positive prospect with the potential improvement in office rents as new supply of prime Grade A office space tapers off beyond 2018. That could be positive rental upside that is compelling for REITs to offer higher dividends for their investors,” she said.
OCBC said the woes of a looming interest rate hike could still linger, but REIT managers are taking measures to prevent it from dampening investor sentiment.
Mr Wong said: “The probability of another rate hike by the end of the year currently stands at slightly above 40 per cent. And if you look at Federal Reserve chairperson Janet Yellen’s recent testimony to Congress, she actually mentioned that the neutral rate for the federal funds rate in the longer term will likely come in below what was seen previously.
“If you look at what the REITs have done in terms of risk management – on average they have already hedged approximately 78 per cent of their borrowings, so this means they will be relatively buffered against any fluctuations in interest rates at least in the near term.”