Real Estate Investment Trusts (REITs) provides investors with the chance to invest in portfolios of real estates managed by professional managers.
They have been rather popular amongst investors who are looking to increase their passive income.
However, did you know that REITs invest in different sectors and there are many different kinds of REITs to choose from?
For those who are interested to invest in REITs, below are the current performance of the different REIT sectors.
Overall, Singapore REITs have reported a decent growth rate of 5.0% in distributions for the second quarter of 2017, with an 8.0% year on year growth in net property income.
S-REIT managers are also slowly turning more optimistic about the future outlook.
1. Industrial – Weak organic growth
However, most of these increases are due to acquisitions, and organic growth remains weak when the same stores are being compared.
Furthermore, the pricing power of the REITs is significantly weakened as seen by generally flat to negative rental reversions. That is expected to continue for the foreseeable future.
With a lack of same-store organic growth for the industrial REITs, those that can seize good acquisition opportunities will stand to benefit. However, with limited opportunities in Singapore, these REITs will likely need to look at expanding their overseas presence to drive growth.
DBS Research: Ascendas REIT (SGX: A17U) with a target price of $2.85; Frasers Logistics and Industrial Trust (SGX: BUOU) with a target price of $1.15; Mapletree Logistic Trust (SGX: M44U) with a target price of $1.28.
2. Hotel – Higher booking rate
Hotels in Singapore continue to face fierce competition with high pressure to keep average daily rates (ADRs) low.
That has resulted in many hotels reporting weaker sequential net property income for the second quarter of 2017.
However, the good news is that overall, most hotel REITs have seen an increase in bookings and the higher demand should be able to push up the ADR in 2018 with the series meetings and conventions that have been lined-up for the next year.
DBS Research: CDL Hospitality Trusts (SGX: J85) with a target price of $1.75; Far East Hospitality Trust (SGX: Q5T) with a target price of $0.70.
3. Retail – Battling competition with e-Commerce
Retail wise, maintaining market share and occupancy rates at shopping centres remain the top priorities of the REIT which are facing an increased challenge from e-Commerce sector.
That is especially so with the recent launch of Amazon Prime, a membership program that provides customers with free shipping and streaming services (amongst other benefits). It is likely to increase competition with local grocers and erode profits.
However, DBS Research opines that the recent 2.0% dip in revenues and net property income for the Retail REITs are primarily transitional and not structural.
For example, the ongoing renovations at Northpoint have affected Frasers Centrepoint Trust’s revenue but is only a temporal problem.
Overall, Retail REITs need to up their game to match the competition posed by their e-Commerce counterpart to remain relevant to consumers and provide as much convenience as possible.
OCBC Research: Frasers Centrepoint Trust (SGX: J69U) with fair value of $2.28
4. Office – Better performance next year
Office REITs have also seen a decline in revenues and net property income by 2.0%. It was mainly due to the negative rental reversions in the portfolios as supply remains high.
However, most of the office REITs have a rather long weighted average expiry profile (WALE) which means that most of their offices are still going to be rented out on contract and not vacant. That will help to limit the downside of these office REITs for now.
One important point to take note is that in 2019, expiring contracts are expected to increase from 8.0% to 15% currently, to 12% to 33%.
Good news is that at that point, it is anticipated that the office market will be in a “undersupply”, which will help REITs to increase rents to achieve positive rental reversions.
That will increase the topline significantly should renewed contracts all be signed at a higher rental rate than now.
With Singapore’s GDP poised to steadily grow at 2.5%, DBS is predicting “stronger pre-leasing activities at office properties”, which will provide a boost for office REITs.