The share prices of S-REITs have been underperforming, pulling valuations below long term averages due to concerns about the fundamentals of the REITs. A higher for longer interest rate environment has stifled economic growth and has led to a situation where demand has outpaced supply in many geographic regions and subsectors.
| Stock | Ticker (SGX) | DPU YoY | 1Y share price performance |
Gearing ratio |
| Mapletree Industrial Trust | ME8U | 1.2% | -1% | 39.1% |
| Mapletree Pan Asia Commercial Trust | N2IU | -4.1% | -24% | 40.5% |
| Mapletree Logistics Trust | M44U | -8.9% | -24% | 39.6% |
| CapitaLand Ascendas REIT | A17U | -2.5% | -6% | 38.3% |
| Capitaland Ascott Trust | HMN | -8.0% | -17% | 37.2% |
| Keppel REIT | K71U | -3.4% | -5% | 39.4% |
| Keppel DC REIT | AJBU | -9.9% | -16% | 35.8% |
| Frasers Centrepoint Trust | J69U | -1.8% | +1% | 39.1% |
| Frasers Logistics & Commercial Trust | BUOU | -1.1% | -24% | 32.7% |
| ParkwayLife REIT | C2PU | 3.5% | -6% | 36.4% |
In this current environment, any REIT that can outperform its previous year performance is likely worth a standing ovation. Here we look at 2 REITs that have done so and identify the factors that contributed to their success.
Mapletree Industrial Trust (SGX:ME8U)
Gross revenue and net property income for 1QFY24/25 rose by 2.7% and 1.3% YoY respectively. The improvement was mainly attributed to the revenue contributions from the data centre in Osaka, acquired in September 2023, and new leases and renewals across various property clusters.
Aggregate leverage ratio was at 39.1% vs 38.7% at March 2024 and 38.2% at Jun 2023. This means that its acquisitions and investments were accretive, as the higher leverage resulted in higher DPU.
The DPU for 1QFY24/25 increased by 3.7% YoY, primarily driven by higher net property income.
MIT’s portfolio mix is approximately 55% in Data Centres, mainly in the USA, and 45% in Industrial buildings, entirely in Singapore. MIT also has 5.1% of its portfolio in data centres in Japan after acquiring its first data centre only recently in May 2023. The data centre in Japan is still undergoing fit out works, expected to be completed progressively by May 2025.
This strategic diversification into one of the most developed data centre markets in Asia Pacific has enlarged MIT’s presence in the growing data centre sector. The asset has a long lease to an established data centre operator, thus providing stable cash flows and is both DPU and NAV per Unit accretive.
Average Overall Portfolio occupancy for 1QFY24/25 increased to 91.9% from 91.4% in the preceding quarter. The average North American Portfolio occupancy for 1QFY24/25 improved to 87.8% from 86.2% in 4QFY23/24.
Average Singapore Portfolio occupancy remained stable at 93.6%. The average rental rate of the Singapore Portfolio rose to S$2.26 per square foot per month (“psf/mth”) in 1QFY24/25 from S$2.22 psf/mth in 4QFY23/24. Positive rental revisions ranging from 2.7% to 12.3% for renewal leases were achieved across all property segments in Singapore with a weighted average rental revision rate of about 9.2%.
The data centre markets in US and Japan also look favourable Overall vacancy rates for primary markets decreased further to 3.7%, driven by continued strong demand from cloud providers and adoption of artificial intelligence
Japan, being a low interest rate market, provides positive spreads, and demand for data centre capacity remains strong, largely driven by increasing cloud adoption as well as rising levels of economic and technological development.
MIT’s portfolio either remains stable or exhibits signs of growth, even in the current challenging operating environment with global uncertainties. Portfolio occupancies and rental reversions continue to improve. MIT has also pivoted to Japan, a country with a low interest rate environment, to achieve accretive acquisitions.
ParkwayLife REIT (SGX:C2PU)
Gross revenue for 1H 2024 decreased marginally by 2.7% YoY, mainly due to the depreciation of JPY, partially offset by the contribution from two nursing homes acquired in October 2023. 1H 2024 net property income correspondingly declined by a marginal 2.5%.
As ParkwayLife has hedged the net income from Japan, the drop in revenue will be compensated by the FX gains from the settlement of the forward contracts. Therefore, DPU grew by 3.5%.
ParkwayLife has a gearing level of 35.3%, an all-in cost of debt at a low 1.35%, an interest cover of 10.6 times and no debt refinancing needs untill March 2025.
The principal FX risk is mitigated as its Japan acquisitions are fully funded by JPY loans (natural hedge). Its Income FX risk is mitigated with JPY net income hedges in place till 1Q 2029. Additionally, about 90% of interest rate exposure is hedged.
ParkwayLife operates in a defensive industry and has continuously made high-quality accretive acquisitions. Its revenue and net property income from the Singapore Hospital properties have also remained stable YoY and will continue to remain stable. It benefits from its exposure to Japan, a low interest environment and has hedges to further secure the benefit. The one downside is the weakening JPY, which can only be mitigated to a certain extent.
Closing statements
The two REITs who have performed well owe this success primarily to their presence in the right sectors and geographic location, namely Singapore Industrial, Data centres, and the Healthcare sector. Being in the right sector ensures stability and provides for positive rental reversions and growth. As a REIT is heavily dependent on debt financing, being exposed to a low interest environment allows them to easily carry out accretive investments.
Conversely, the REITS that didn’t perform well were not only impacted by a weakening in their fundamental business, seeing higher vacancies, poorer rental reversions and higher costs but also by financial factors such as higher interest rates and unfavourable exchange rates.
The MAS has just announced a proposal to simplify the leverage requirements for all S-REITs, proposing for a single aggregate leverage limit of 50% and a minimum interest coverage ratio (ICR) of 1.5 times.
Currently, S-REITs have a leverage limit of 45% if the ICR is below 2.5 times, and a limit of 50% if the ICR is above 2.5 times.
The regulatory limit serves as a way to manage the risk profile of REITs for investors. Lifting the limit would allow the better REITs to increase their leverage by making more accretive investments, and bring value to shareholders.
Consequently, the stronger REITs could be poised for more upside, while the weaker REITs may be poised for more downside. In this regard, we believe that MIT and ParkwayLife REIT are two of the best REITs in Singapore today.
[Not all REITs are created equal]
While REITs are a great form of income for investors, selecting poorly can pose risks.
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