2024 was a turbulent year for global REITs with CSOP iEdge S-REIT Leaders Index ETF (SGX:SRT) and Lion-Phillip S-REIT ETF (SGX:CLR), two Singapore-listed REIT ETFs, down 11.6% and 9.9% respectively. While the majority of the REITs delivered lackluster results, there were some REITs that exhibited strong growth, like Cromwell European Real Estate Investment Trust (SGX:CWBU) with an impressive 25% growth in 2024. The table below is a summary of the 2 ETFs and the REITs that they track, which resulted in their respective 2024 performances.
What’s Next for S-REITs After a Tough 2024?
Let’s dive into the prospects of S-REITs through two key components. The first section involves an overview of the highlighted earnings and operation statistics of the 4 best-performing, 4 worst-performing and 2 stagnant REITs. This will help us to understand which sector and macroeconomic dynamics played a pivotal role in influencing their performance. Then, I will seek to extrapolate and draw parallels to understand what sectors might benefit from the current momentum.
Earnings and Operational Statistics
I’ve compiled a summary of the highlighted earnings of these 10 REITs above. The general observiation is that REITs with Net Property Income (NPI) growth accompanied with high dividend yield (proportion of DPU to share price) tended to outperform. The consensus made is a rather simplistic generalisation, as there are outliers like Lippo Malls Indonesia Retail Trust (SGX:D5IU) and IREIT Global (SGX:UD1U), where performance did not correlate with their financial results. This is because there are other macroeconomic factors at play which will be discussed later on.
Below is a table that provides further breakdown into the country and industry that the respective REITs operate in, and the leverage level (net gearing ratio) reported in their latest earnings report.
Trends at play
Based on these tables, we can identify a couple of trends that that shed light on the type of REITs that investors are interested in, and extrapolate for possible plays in 2025. Firstly, REITs with a leverage ratio below 40% seems to be more favourable for investors’ appetite in the current economic environment. This is clearly demonstrated by our top 3 REIT performers Cromwell European Real Estate Investment Trust (SGX:CWBU/CWCU) and Keppel DC REIT (SGX:AJBU).
However, an interesting question arises when comparing CWBU/CWCU and UD1U, as they operates in the same region, yet their 2024 performance diverged despite UD1U having a much better leverage ratio . This appears counterintuitive at first glance..
The reason for the difference is that CWBU/CWCU have a much higher occupancy rate than UD1U at 93.9% and 89.8% respectively. Furthermore, CWBU/CWCU focuses on the logistics and light industrial sector that is driven by growth in E-commerce and supply chain reconfiguration in the region. In contrast, UD1U focuses on office properties that were impacted by Covid-19 and continues to be under pressure due to remote work and hybrid working models. Furthermore, its office properties are concentrated in Germany, a country that is currently experiencing high unemployment, which undermines any positive outlook for the REIT.
Next, industrial trends such as the increasing demand for data centers and E-commerce cannot be ignored. The proliferation of cloud computing, digital economy and logistics and distribution are expected to generate growth. Moving ahead, focusing on REITs with portfolios operating in these sectors could be beneficial.
Thirdly, the rise in interest rates has significantly affected REITs, especially those operating in the US office market, specifically Prime US REIT (SGX:OXMU) and Keppel Pacific Oak US REIT (SGX:CMOU). This led to them having trouble servicing debt and having a higher leverage ratio. These businesses have noted that a decrease in interest rate would relieve the pressure and increase retained earnings for distribution.
Despite the difficulties, the REITs that engaged in active portfolio management were more resilient. CapitaLand Integrated Commercial Trust (SGX:C38U) focused on a high occupancy ratio portfolio and refinanced its debt with 76% of borrowings in fixed interest rates, shielding it from inflation.
Lastly, from a macroeconomic standpoint, consumption is expected to return with lower interest rates, especially in Asia. In SEA, Indonesia, Vietnam and Philippines recorded Q3 GDP YoY growth of 5%, 6.8% and 5.8% respectively. REITs positioned with portfolios in retail and consumer-related sectors should be monitored. Consumption may not have fully recovered but there is growth potential especially when business activities remain robust with strong foreign direct investment (FDI) in these countries. However, investors should be cautious with REIT portfolios in Europe due to slow economic growth and debt burdens looming in various economies across the region.
Will S-REITs recover in 2025?
Overall, investing in REITs requires investors to be increasingly picky, even for pure dividend plays. The high interest rate and inflationary environment means that not every development can pull through if the portfolio is not properly managed. As the market is pricing in lesser Federal Reserve rate cuts in 2025, office REITs may continue to underperform and REITs with fixed interest payments will continue to be the darling of investors. We encourage a cautionary approach rather than be solely attracted by the dividend yield, as that is no longer a viable approach under the increasingly uncertain and multifaceted macro environment.
P.S. if you’re interested in REITs and want to build a dividend portfolio, join Chris at his next live webinar to learn from someone who has retired doing just that.