As of October 31, 2017, Asia Pacific REITs have recorded a total return of 5.3%. Among the four major REIT markets, Singapore has the best performance, returning 22% in local dollar terms.

It is often said that the direction of listed real estate, of which REITs is a type, leads the direction of the direct market by six to 18 months.

Thus, the strong performance by Singapore REITs may be an indicator that Singaporean real estate may see an upturn.

Local property sector climate

Evidence on the ground suggests a similar movement. Collective sales of HDB projects have been active this year, suggesting that developers are eying profit from redevelopment.

Rents for office and other commercial sectors have also stabilised. Third-quarter rents for the Singapore office market have risen by 2.4%, reversing the negative trend seen in the last nine quarters, according to the Urban Redevelopment Authority (URA).

The new addition to supply for the quarter was 10,000 square metres, net demand and absorption was 13,000 square metres.

Co-working spaces demand to increase

In addition to more traditional tenants that lease for their own use, co-working space operators have also provided a new source of demand.

At the high level, a co-working space occupies a medium to large size office space and provides working space to freelancers or smaller companies.

The end-tenants typically pay a person fee to access the working space and the amenities, and they save the need and expense to run their own office space.

At times, the co-working operator may also configure a space for specific tenants by providing training workshops or industry-specific library services.

As the economy diversifies and more young people are working in rapidly evolving industries, the demand for co-working space should increase.

The demand for co-working space will be added to existing office demand, potentially driving the next rental upcycle in Singapore.

Tourist numbers rising

Beyond offices, other sectors in Singapore are also showing strength. Tourist arrivals, for example, have increased 4%, year-over-year, to reach 8.5 million in the first half of the year.

Singapore is a top tourist destination in Asia Pacific and around the world. For instance, Singapore was listed as the most welcoming city in a newly published index by TravelBird.

While RevPAR is still recovering, with some hotel REITs still reporting a minor drop in 3Q RevPAR, we believe that a sustained growth will start driving rental growth in the hotel sector.

Fed interest rates

As has been discussed in this column, we believe that the pace of interest rate increase will be gradual. Jerome Powell, the current nominate for the next Federal Reserve chairmanship, has relatively little experience in public services.

Without a track record of academic writing or voting record as official, it is difficult to ascertain Mr Powell’s monetary philosophy.

However, it will be a surprise if President Donald Trump chooses someone hawkish for the job, especially when he is trying to push through a tax cut to stimulate domestic investment.

Thus, our working assumption is that a Powell-Fed will not be any more hawkish than the current Yellen-Fed. We believe that the real estate cycle will continue to be driven mainly by demand and rental increases.

Concluding thoughts

Given this backdrop, we believe that while it is likely to be difficult to repeat the same percentage return in 2018, Singapore REITs remain on solid footing.

Of the other REIT markets in Asia Pacific, Hong Kong has a similarly strong year. Australia’s performance of about a 10% return is weaker than those of Singapore and Hong Kong, but it is in line with the long-term average performance of REITs.

Overall, fundamentals of Asia Pacific REITs remain solid in most of the major markets.