Currently, S-REITs appear a little stuck because valuations in Singapore remain robust while capitalisation rates remain relatively compressed compared to other developed markets. As a result, S-REITs cannot acquire Singapore properties because asset value yields are well below funding costs, which means S-REITs cannot grow inorganically. Meanwhile, Singapore’s GDP growth is muted, so they cannot grow organically either. In Koh’s view, the upshot of all these is that S-REITs face challenges growing both organically and inorganically.
It has not gone unnoticed that S-REITs with a Singapore focus have fared a lot better in terms of maintaining distributions per unit (DPU), occupancy and rents than those with an overseas bias. As a result, valuations of those with a local focus are also better than those with an overseas bias. The exception could be CapitaLand Ascott Trust (SGX:HMN
) (CLAS), which has mainly overseas assets.
““Singapore has solid attributes of being a safe haven. It's a double-edged sword. It's a benefit in the sense that we've seen inflows to physical property assets. As a result, Singapore property values have been pretty well supported in an environment where global property values have come under quite a significant amount of pressure, especially in Europe, and to some extent in the US. As late as mid last year, you saw family offices buying buildings here for cash. On the flip side, with REITs’ cost of capital having risen substantially amidst the selloff in equities and higher interest rates, the sticky property values have made it now that much harder for them to acquire assets accretively,” notes Koh Shern Ling, portfolio manager of Principal Asset Management.
