Adam Rusmman and Victor discuss Singapore REITs (Real Estate Investment Trusts) and whether current market conditions present a valuable investment opportunity. They explore the impact of interest rates, the advantages of REIT mergers, and the performance of different sized REITs.
Investing in Singapore REITs for Income
Singapore REITs are attractive investments for those seeking income due to their structure. To maintain tax transparency, they are required to distribute at least 90% of their income. This results in a tax-free status for the REIT itself and 0% tax on dividends for Singaporean investors. This makes them a compelling option for dividend-focused portfolios.
REIT Mergers: Advantages and Disadvantages
Advantages of Mergers
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Cost Efficiency: Mergers often lead to more cost-efficient operations due to economies of scale.
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Diversification: Merged REITs can achieve greater diversification across different property sectors (e.g., retail and commercial) and geographical locations, reducing risk. A bigger REIT also gives them an economy of scale.
An example is the merger of CMT and CCT, forming CICT, which became the second-largest REIT in Asia Pacific at the time. Larger REITs gain advantages in borrowing power, securing more favorable interest rates from banks due to the increased loan quantum. Furthermore, a larger portfolio increases tenant diversification, boosts prominence, and can facilitate inclusion in major indices and ETFs, potentially driving up unit prices.
Potential Disadvantages of Diversification
While mergers are often touted as beneficial, some investors prefer more focused REITs. Diversification, while generally positive, can dilute exposure to specific sectors or geographies that investors find particularly attractive. For example, an investor might prefer a pure retail REIT for its inherent resilience or a pure commercial REIT to capitalize on business cycle uptrends.
- For instance, the merger of Mapletree Commercial Trust with Mapletree North Asia Trust, while creating a larger entity, introduced exposure to Hong Kong and China, whose markets have since underperformed, dragging down the overall portfolio.
Ultimately, the quality of management remains crucial, regardless of the REIT's size or diversification. Merger announcements tend to be fait accompli, limiting investor influence at AGMs or EGMs.
Performance Analysis: Big Cap vs. Mid Cap vs. Small Cap REITs
The discussion shifted to whether larger REITs consistently outperform smaller ones.
Defining Market Cap Categories
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Small Cap: Market capitalization less than SGD 1 billion.
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Mid Cap: Market capitalization between SGD 1 billion and SGD 5 billion.
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Big Cap: Market capitalization greater than SGD 5 billion.
These definitions, while used for this analysis, may vary among different market participants.
10-Year Total Return Comparison (2015-2024)
Analyzing data from SGX and other sources, the following average total returns (including dividends) were observed over the past decade:
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Big Cap REITs: 91%
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Mid Cap REITs: 40%
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Small Cap REITs: -31% (Negative 31%)
It's crucial to note that some smaller REITs have shorter listing histories, potentially skewing the results.
Interpretation and Caveats
While the data suggests that larger REITs have historically performed better, it's important to avoid drawing simplistic conclusions. The classification of a REIT can change over time due to mergers or performance fluctuations. For example, First REIT was once a mid-cap performer but has since declined to small-cap status.
A degree of self-selection bias exists. Those that perform well generally grow to become big caps, and those that don't drop and become small caps.
- Therefore, focusing solely on market capitalization is insufficient; investors must consider the underlying quality of the REIT, the quality of the manager, and the purchase price.
Key Factors for REIT Investment Success
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Quality of the REIT: Understand the REIT's business model, assets, and market position.
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Valuation: Avoid overpaying, even for high-quality REITs.
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Timing: Entry point is crucial for maximizing returns.
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Manager Quality: Assess the alignment of the REIT manager's interests with those of unit holders.
Current Market Opportunity: Are REITs a Good Buy Now?
The consensus is that Singapore REITs are currently undervalued due to high interest rates and potential bad news.
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Valuation and Yield: Singapore REITs are trading at historically low valuations based on price-to-book ratios and offer attractive yields.
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Interest Rate Outlook: If interest rates are expected to remain high indefinitely, the opportunity may be limited. However, if interest rates are likely to decline in the coming years, the current low valuations present a potential catalyst for future growth.
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Bottoming of Finance Expenses: Recent quarterly results show that many REITs have flat or declining finance expenses, suggesting that the impact of high-interest rates may be nearing its peak.
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Rental Reversion: Good quality REITs are demonstrating positive rental reversion, indicating the ability to increase revenue even in a challenging environment. These factors combine to create a potential for DPU growth as revenue increases and expenses decrease.
Risk-Reward Analysis
The presenters believe the current risk-reward ratio for Singapore REITs is attractive. Investors are getting paid to wait with a decent yield while the valuation is cheap. Even if interest rates don't drop in the near term, investors have the divity that could buffer any potential losses of the capital gains. Diversifying across multiple REITs will also help.
Conclusion: Quality and Valuation are Paramount
The central message is that quality, valuation, and management quality are the most important factors in successful REIT investing. While larger REITs may have historically outperformed smaller ones, this is not a guarantee of future success. Investors should focus on identifying well-managed, financially strong REITs with high-quality assets, acquired at attractive valuations.
The speakers suggest combining investments with a bank stock to hedge against interest rate movements. Overall, they consider the present conditions for Singapore REITs a place to plant some seeds that bear fruit later.