Investments can be generally graded on a scale from worst to great investments. There are good investments and there are better investments. REITs are generally perceived as an attractive investment option for yield-hungry investors. S-REITs in particular offer a few benefits for investors: high dividends, generally good geographical diversification and better performance versus SGX blue chips over the long term.
In addition, it is not surprising that with inflation headlining news all across the world, S-REITs appear to be positioned well to weather this storm, whether transitory or not. First, when we take a look at gearing ratios (the ratio of a REIT’s total debt to its total assets), all S-REITs fall way below the MAS-imposed rule of 50% with a few exceptional ones bordering 20%–30%. Also, interest coverage ratios appear very healthy except for a couple of REITs.
Whether in a low interest rate or high interest rate environment, it appears that REITs are the savvy investors best friends. Investors should be aware though, that as risk-free rates rise, some REITs could see their yields expand to maintain a yield spread. As such, unit prices could fall, or distributions would need to rise.
At any rate, not all REITs are made equal. Even if we were to see a marginal difference, no matter how marginal the difference in returns may seem, more profits are always more favourable (of course, historical performance does not always indicate future performance). If we were to conduct a macro analysis of REITs by constructing our own basket of REITs weighted by market cap and grouping them by sectors, this should make this argument stronger.
Why you should invest in REITs in specific sectors
Let me first explain how I constructed the sector-specific baskets of S-REITs. Using Bloomberg, I first used the methodology of REITAS to group the S-REITs into sector-specific baskets that are market-cap weighted and construct these indexes from scratch. Then I normalised each created index as of Dec 31, 2020. The comparisons were made till Dec 13, 2021.
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One limitation of this analysis is that of our time horizon. This is because some retail REITs were only recently included in the Singapore Exchange (SGX). The analysis is nonetheless useful to observe resilience of performance within a volatile and uncertain market, with similar economic conditions like the one we have had over the past year.
Chart 1 can be interpreted as such — as the ratio of the equity index (i.e. industrial, retail and office) rises against the iEdge S-REIT Leaders Index, it represents increasing outperformance of these indices over that of the overall S-REIT Index (which is commonly seen as the benchmark for S-REIT performance).
We can observe two things on performance — first thing is that all three sectors performed marginally better within the past year as compared to the overall S-REIT market. It seems that taking a position within the iEdge S-REIT Leaders Index would have performed poorer than a sector-specific approach.
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Of course, there are no current sector-specific REITs you can get exposed to immediately and you would have to construct your own sector-specific S-REITs basket and these added day-to-day monitoring and rebalancing costs may eat into your overall returns.
The second thing we can observe is that there is a difference in performance and volatility of returns amongst the three sectors. It seems that office REITs as a whole generally performed better than retail and industrial REITs, and are less volatile in uncertain markets.
This difference is perhaps more apparent when we observe the second chart.
Chart 2 is purely based on the performance for each sector-specific REITs and we can, unsurprisingly, see a similar behaviour in better performance and lower volatility by office REITs compared to industrial and retail.
It is also important to note that the reason industrials took a deep dive from February to March 2021 period is likely from the investor reallocation into more cyclical REITs as analysts have observed that such REITs generally offer lower yields and DPU growth compared to the other sectors.
Based on this in-depth analysis alone, you might think that office REITs are the way to go. And you might be right. It is important to note as each of these constructed indices are market-cap weighted, they have more dominant REITs that overweight each of them. For example, Keppel REIT dominates the office REITs basket, with a more than 44% weightage. The REIT’s specific performance would have largely influenced the performance of the index.
How can we then get immediate exposure to sector-specific REITs?
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As there are currently no sector-specific REIT ETFs to invest directly into, you may construct your own portfolio, but as shared earlier, commissions and other trading-related costs may eat into returns in the long term. With more commission-free trading platforms, this could be circumvented. However, it is also important in investing that a broker’s long-standing reputation and strong financial performance be a consideration as well, especially when investing for the long term as there is a definite firm risk. Unlike current long-standing brokers that have been tried and tested, these newer brokers tend to have risk management protocols that have not been tested through major financial crises, so investors must take note.
Of course, fundamentals are still important
Also, it will be wise to do further analysis into each individual REIT before making an investment decision. For example, a lower than 100% payout ratio may indicate financial prudence (S-REITs have to payout at least 90%). A long history of paying a steady dividend yield may also indicate the REITs ability to weather volatile periods of inflation and recession. All these and more should be part of your robust analyses before making an informed investment decision.
No matter what investor you are, REITs should be in your overall portfolio
REITs as a robust, diversified, sound investment vehicle will make this asset group a popular one for some time to come. Strong, consistent yields regardless of the interest rate environment and the ability of certain REITs to weather inflation very well put it in a prime position to benefit from the current hawkish market we are currently in. Overall, it seems that a sector-based analysis of investing in S-REITs suggests that it is more profitable than a broad S-REITs approach. For seasoned investors, a replicating model to construct this sector-based REIT portfolio might be worth exploring. For the slightly less sophisticated long-term investor, I would still argue that investing in a few fundamentally sound REITs for yields is still a viable investment strategy.
Andrew Lee is a strategist at Phillip Futures
Cover photo: Keppel
