REIT is a popular category for Singaporean investors. With the Fed in the early cycle of its rate hike cycle, investors are getting worried about the prospects of the REIT they own. How should investors be investing in REITs in a rate hike environment?
Investors Takeaway: Invest In REITs Expanding Overseas
In the past, investors have been discounting REITs that have taken steps to expand outside of Singapore. This is partly due to forex risk concerns and unfamiliarity with an overseas market. DBS believes that investors looking to invest in REITs should learn to accept and understand REITs’ overseas expansion mandates as it has led to more sustainable distribution per unit (DPU) growth and add resiliency to our S-REITs.
According to DBS, a well-thought overseas expansion strategy with a focus on delivering positive risk-adjusted returns will benefit and help REITs move past operational hurdles going forward. Moreover, a change in strategy will provide exposure to an attractive and growing market as well as accelerating the earnings/DPU growth outlook.
As most properties in Singapore are on leasehold (30 or 99 years), expanding overseas will allow REITs to gain access to certain freehold properties too.
4 Risks That REITs Must Mitigate While Expanding Overseas
Apart from growth, REITs also need to mitigate the downside risk of overseas expansion. There are four criteria that DBS believes investors should be looking for in REITs with overseas exposure.
Firstly, REITs that focus on protection of net asset value, instead of just solely on DPU growth, should be worth a slight premium. Secondly, REITs should expand into countries that share similar geographic risks as the current portfolio to avoid mismanagement of real estate. Thirdly, REITs that stay with the same asset class will allow the REIT manager to derive full value from the overseas expansion. Lastly, if the REIT has a backing from a sponsor with scale, it will help the REIT successfully build an established overseas presence.
Which REIT Sub-Sector Is Suited For Overseas Play?
However, not all REITs are suited to expand overseas.
Retail: Value To Remain A Pure-Play
According to DBS, Singapore’s retail market is a natural harbour for retail REITs despite the rising presence of e-commerce. Retail REITs that remain as a pure play will be more advantageous instead of venturing overseas into countries that will face a larger e-commerce threat.
Hospitality: Go Forth And Multiply!
The hospitality industry is in a unique position compared to the other REIT sub-sectors. Hotels are typically managed by global hotel chains which already have presence and expertise in the various overseas markets.
There are many advantages for hospitality REITs to go overseas and expand. Overseas expansion will help hospitality REITs to counter the seasonality of the hospitality industry in Singapore. Also, due to the volatile nature of the hospitality industry, overseas expansion can help hospitality REITs ensure a more stable and sustainable DPU profile.
Industrial: Overseas Expansion A “Necessary Evil”
Similar to the hospitality REIT sub-sector, repositioning the portfolio into other countries can help industrial REITs offset the industry downturn in Singapore. In addition, the 30 years land tenure for REITs in Singapore will erode net asset value (NAV) per unit for REITs, which can be alleviated through overseas expansion.
Office: Mitigates Impact Of Downturn In Singapore
Compared to the industrial REITs, office REITs have it better as commercial land in Singapore has a land tenure of up to 99 years. That said, while the pressure to protect NAV dilution over time is not as severe, there are still merits to expanding overseas as it provides a mitigation against downturn in the Singapore office market.