Investors will have to scrutinize the fundamentals of Real Estate Investment Trusts more closely as headwinds coming from rising borrowing costs and bleaker outlook for commercial and industrial property rents gather in the horizon.
REITs have become extremely popular since they debuted on the Singapore Exchange more than a decade ago, especially in recent years when the global financial crisis heralded an era of zero or even negative interest rates, making stocks the offer hefty dividends attractive.
From its humble beginnings since the listing of Capitaland Mall Trust, in July 2012, the SGX now boast of 37 REIT listings, with a combined market capitalization of over $73 billion. That’s about 7 percent of the total $1 trillion market cap of the Singapore bourse.
Among the biggest components of the benchmark Straits Times Index are REITs, with industrial landlord Ascendas Real Estate Investment Trust at the top with a market cap of $7.7 billion. Capitaland units CMT and Capitaland Commercial Trust have the second and third-highest market values.
But with so many REITs to choose from, what criteria should investors use when investing in these securities? Should investors buy REITs purely based on their dividend yields?
While a high dividend yield is a good indication, investors should also consider other factors before investing in REITs such as the company’s debt levels, Ernest Lim, a remisier at CIMB Securities, said.
``Higher existing gearing may reduce the headroom to make earnings accretive acquisitions and may also affect future distribution per unit amid the rising interest rate environment,’’ Lim said.
Sabana Shariah Compliant REIT has among the highest gearings among Singapore-listed. The company also gave investors a negative total return of 37.2 percent in the past three years even though it offers the highest yield of 10 percent among its peers, SGX data showed.
The company’s CEO Kevin Xayaraj stepped down in May and the company terminated a deal to buy an office warehouse from Freight Link Properties, a subsidiary of Sabana REIT’s sponsor Vibrant Group. The board has pledged to undertake measures to boost its operating performance.
REITs are facing several headwinds, according to Nicholas Teo, a market strategist at KGI Securities. Besides rising interest rates, landlords are grappling with the prospect of falling rents amid a supply glut in both office and industrial space.
Some 3 million square meters of industrial space will become available until the end of 2017, according to a report by Jurong Town Corp. That’s more than double the average annual estimate demand of between 1.2 million and 1.9 million square meters, it said.
Office vacancy rates are expected to climb to a 13-year high of 18 percent this year from 13 percent in 2016 amid sluggish demand for office space and as new buildings in the core central business district are completed, according to a May report by DBS Bank.
Despite the promise of high dividend pay outs, REITs are definitely not entirely risk free, Teo said.
``If rentals were to be revised lower, investors may see lower payouts,’’ Teo said.
REIT exchange traded funds may be a better bet to minimize such risks, as such instruments offer diversification across subsectors and across geographies, he said.
There are two REIT ETFs listed in Singapore currently such as Phillip SGX Asia Pacific Dividend Leaders REIT ETF and Nikko Asset Management Straits Trading Asia ex-Japan REIT ETF.
Both ETFs track the index performance of a basket of REITs across the region. As such investors get exposure to a geographically diverse portfolio at less cost compared to investing in each of the REITs and at the same time investors get access to international markets and asset classes that are normally not accessible to individual investors, according to SGX.