Is the Worst Over for Singapore REITs?

In the previous post, I talked about whether the worst is over for the market, as US equities has rebounded strongly in one month, and even STI climbed by approximately 4%.  This makes me wonder if the largest sector in my portfolio, REITs, is enjoying the same upward run.

As one who has a dividend portfolio that is rather concentrated in Singapore Real Estate Investment Trusts (REITs), my portfolio was badly beaten down since April 2022, where the downtrend aggravated since August 2022.  As seen below, the CSOP iEdge S-REIT Leaders Index ETF fell from a peak of SGD 1.018 in April 2022 to a low of SGD 0.769 in October 2022, which is a drop of 24.5%.  However, since then, the S-REIT index has slowly but surely crept up to SGD 0.888 by the end of January, which represents an increase of 15.5%.

So, is the worst over for the REITs?  Has the impact from high interest rates been priced in fully, and hence, it's just upside from this point onwards?  

Personally, I think there is still uncertainty around the outlook of REITs, due to the following reasons:

1)     Interest Rates

One of the main impact that REITs faced in current environment is the high interest rate.  As all REITs operate with some level of leverage, their net income will be sensitive to interest rate, and that will inevitably impact the distribution per unit (DPU), which is one main concern of REITs' investors like myself.  Recently, the REITs have released their earnings report, and its quite clear many REITs' DPU has been impacted to some extent due to the high interest rate environment.  One example is Mapletree Industrial Trust (review of their performance stated below):  

"The lower amount available for distribution to Unitholders, despite an increase in net property income was mainly due to higher borrowing costs and manager’s management fees.  The higher borrowing costs were attributed to the higher interest rates in 3QFY22/23 compared to the comparative period.  Higher manager’s management fees were due to better portfolio performance and increase in value of assets under management."

In addition, it still remains unclear what is the peak interest rate desired by the FED.  If they continue to increase interest rates, albeit at a much slower pace, the consistently high interest will remain a dampening pressure on REITs' interests expenses, and in turn putting pressure on their DPU.  This is quite visible when the 10-year bond yield rose above 3.5% last Friday, which caused most REITs' prices to fall, depicting their sensitivity to the slightest movement in rates.

Nonetheless, in the latest FED meeting, Jerome Powell has somewhat sounded less hawkish, but held his stand that there will be no reduction in interest rates in 2023.  Blogger Financial Horse has written about this recently, and painted 2 possible scenarios.  In both scenarios, things do not look positive for REITs in the mid-term, especially if a 1970s "Paul Volcker" moment comes to fruition.  We shall see how things play out. 

2)     Looming Recession

This topic has been on-going since end of 2022.  Recessions are not good for REITs generally.  If recession hits, possible outcomes are:

a. Companies try to save cost and scale down their business.  This may result in their decision to rent smaller warehouses, office spaces, retail spaces etc.  This will in turn impact retail, logistics and commercial REITs.

b. Individuals may have to tighten their belts and spend less.  This may impact their decision to shop and travel.  Thus hospitality REITs may be affected.

However, not all is lost.  Individuals still need basic necessities and consumption.  I believe retail REIT like Frasers Centrepoint Trust will not be affected much because being the "King of Suburban Malls", I think it will even emerge stronger in times of recession, as the public spend less on wants and focus more on needs.

On the flip side, will recession actually hit?  It is anyone's guess.  Many analysts are saying that it will happen, and this is supported by the dismal earnings of many companies, especially most recently, those of the big 3 tech, Alphabet, Amazon and Apple, accompanied by news of mass layoffs.  On the other hand, data released shows employment remained strong, and unemployment rate continued to fall to 3.4%, an almost 54-year low!  These conflicting data is definitely putting FED in a tight spot, and their decision moving forward will probably determine if we are off to a soft landing or hard crash.

In spite of all these confusing data, the REITs had a spectacular performance near term.  Top performer is Keppel DC REIT, which is one of the REIT that had suffered the most severe downward price pressure in 2021-2022 period.  This could reflect the risk-on appetite by investors of S-REITs for now.  Not surprisingly, the worst performer (but still experienced a good 12.8% upward climb) is Parkway Life REIT, my personal favourite REIT.  This is most likely because Parkway Life REIT has the lowest yield, and thus unfavoured by most investor at this juncture. 

Overall, I remain cautious on the performance of Singapore REITs.  As the REITs that I hold in my portfolio are quality REITs with strong sponsors and capable managers, I believe they will manage the REITs with the interest of the investors in mind.  Although some REITs are facing certain headwinds, the re-opening of China to the rest of the world may in time help to mitigate the pressures certain REITs are facing.  Personally, I am looking forward to future positive rental reversions for properties under Mapletree Pan-Asia Commercial Trust (MPACT), namely Festival Walk, to boost the DPU in coming quarters.  

Hopefully the DPU for all the REITs in my portfolio can be maintained in 2023, or even improve slightly, for me to achieve my personal targets.  I will just hold on the all the shares I currently own, and reinvest the dividends upon payout.  However, capital injection will pause for now, as after this rebound in January, valuations of S-REITs are no longer cheap (unless any of the REITs in my portfolio fall to give more than 6.5% yield again).  Regardless of the macro-environment which is out of my control, I will just hope for the best, but always be prepared for any unknowns by starting to save up some cash buffers.  Barista FIRE, here I come...!