By Victor Yeung
As we have discussed in this column several months ago, Singapore’s real estate market seemed to have turned the corner in 2017. The enbloc transactions of residential projects suggest that developers are interested in accumulating their land bank again, and the early signs of office rental increases suggest that the general real estate market has reached an equilibrium point. As such, we have suggested that REITs and other forms of real estate may begin to see positive performance in 2018.
While the Singapore real estate market seems attractive, we continue to believe that a diversified REIT strategy in the region makes more sense for Singapore investors. Several factors suggest that investors should consider a region-wide strategy.
First, multiple Asia Pacific markets have recorded sustained growth over the last two decades. Asia-Pacific REITs started in 2001 when Japan listed Nippon Building Fund. Before that, REITs only existed as a small sector in Australia and New Zealand, with a total of 24 entities and a total market cap of US$7.8 billion at the end of 1999.
From this small foothold, REITs have recorded growth almost every year since then. At the end of 2017, there were 245 Asia-Pacific REITs, with a total market cap of US$330 billion listed in Australia, Japan, Singapore, Hong Kong, and other smaller markets including Taiwan, Malaysia, Thailand and India. Several Singapore or Hong Kong-listed REITs were also dedicated to assets located in China and Indonesia.
In addition, the size of individual REITs has also grown with time. In 1999, the simple average market cap of all Asia Pacific REITs was US$325 million, and the median Asia Pacific REIT had a market capitalization of US$133 million. In 2017, the simple average market capitalization of Asia Pacific REITs was US$1.35 billion, while the median had a market cap of US$568 million. As a general rule of thumb, REITs over US$1 billion in market cap should be enough to generate interest and trading volume for large investment funds. Thus, the landscape for Asia Pacific REITs has matured into a standalone investment sector.
The second reason for a regional strategy is because diversification can stabilise income growth and hence investment return. For example, the entire group of Asia Pacific REITs saw 2017 dividend yield increased slightly to 4.68 percent, from 4.40 percent in 2016. During the same time, however, dividend income rose by 11 percent1 in 2017. Investors not only benefit from higher yield, but also benefitted from price appreciation driven by higher dividend payouts. As a result, total return was over 11 percent in 2017.
We believe that this is good evidence that interest rate increases are not automatically negative for REITs. In fact, interest rate increases usually happen during economic expansion when rents are generally trending up to improve REITs’ performance to drive higher dividend payouts. On the other hand, fixed income instruments like bonds, do not offer increments in their income.
While we think Singapore real estate market is well positioned in the short term, Singapore investors do not need to drastically adjust their portfolio for now. Nonetheless, knowing the alternatives will help investors as the year progresses, especially when investors are considering to take profit and reinvest their monies.