To The Moon

In light of the current landscape, characterized by high interest rates and a battered REITs market, many investors share a common concern: “How do we navigate the current REITs market? With high interest rates, does it still make sense to invest in S-REITs now?”

What is the current situation regarding high interest rates and the S-REITs market?

Since March 2022, the U.S. Federal Reserve started the rate hike cycle in an attempt to curb the high inflation that was driven by factors such as pent-up demand from Covid, supply-chain constraints and higher commodity prices from geopolitical events.

Higher interest rates increase financing costs, thus hurting the corporate profits of businesses. This is especially so for the REITs sector which relies heavily on borrowings to fund for their property acquisitions.

Consequently over the past 2 years, many REITs have been more prudent in their capital management to ensure that their leverage ratios remain within acceptable limits, and have been less active in pursuing new acquisitions. 

Additionally, higher interest rates may also result in lower valuations for their properties.

Therefore, investors become more risk averse and switch to fixed income instruments that are paying a higher yield under the high interest environment, resulting in a sell-off in the S-REITs market in the last 2 years.

Lion-Phillip S-REIT ETF (Source: Tiger Brokers)

This comes as a shock for many income investors, who have long believed that S-REITs are very safe and stable investments and did not anticipate downward fluctuations exceeding 20%.

How should investors navigate such a market environment?

The key question, in any crisis, is to ask ourselves, “Will this last forever or is it likely to be a temporary event?” In our view, we believe that the current high inflation and high interest rate environment is part of a typical cycle that the market goes through.

We got to understand that the stock market moves in cycles. Economic changes, business profits, government interventions, and other factors influence the market cycle. Once inflation stabilises, the Fed would shift towards rate cuts to normalise the rates. This would make rate-sensitive sectors such as REITs look attractive to investors again and boost the demand for REIT investments. 

If history can serve as a useful guide, we have seen how over the past decades, investors have navigated through economic expansions and recessions, experiencing both rising and falling interest rates environments. As economic conditions evolve and business profits fluctuate over time, central banks intervene accordingly to manage interest rate levels appropriately. Since 1990s, we have been through multiple “crisis” which have resulted in the Fed embarking on rate hikes and rate cuts respectively to resolve the “crisis”.

Changes in interest rates from 1990s - 2024

Since last year, the U.S. Fed has also suggested possible rate cuts this year. While the market expectations for rate cuts have declined from 3 rate cuts to 2 this year, it also shows that we are possibly at the peak of the interest rate cycle. Markets are now pricing in for a 64.9% possibility of a rate cut to come in September based on the CME FedWatch Tool.

Source: CME FedWatch Tool

Fundamentally, many S-REITs are still performing well in terms of their operations and financials

Despite the challenging environment, many S-REITs maintain resilient financial metrics. Although the average interest coverage ratio and aggregate leverage ratio have weakened since FY2022, the more robust S-REITs have their ratios stayed within the regulatory limits. According to data by SGX, the S-REIT sector has an average gearing ratio of 38%.

If we drill down to assess the financial profitability and performance of individual REITs, we would be able to observe that the more resilient REITs have generally been able to deliver stable earnings in the last 2 years.

Operational metrics also remained robust with most real estate subsectors delivering rental reversionary trends. Occupancy rates also remained stable for the resilient REITs.

Take for example, $CapLand IntCom T(C38U.SI)$, which is the largest REIT listed on the SGX. Despite the challenging macroenvironment of high interest rates, CICT managed to grow its gross revenue and net property income for FY2023 by a high single-digit percentage.  Distribution per unit also increased by 1.6% during a period where some S-REITs were reducing their DPU or some underperforming ones even had to halt their distribution, resulting in loss of investors’ confidence.  

CapitaLand Integrated Commercial Trust Financials FY2023

CapitaLand Integrated Commercial Trust Distributions FY2023

Despite the robust financial performance, there is a divergence in terms of share price performance. Comparing its latest share price as of end May 2024 with the beginning of 2022, it was down about 4%. At one point in time, it even declined by more than 15% since 2022.  

If investors are able to capitalise on such inefficiencies in the stock markets to accumulate more units of the resilient and sound REITs, we will be able to build up a portfolio of quality assets in our wealth accumulation journey to generate profits. In the short term, the stock market pricing is usually driven by the market sentiments. But over the longer term, it should move more in tandem with the fundamentals of the businesses.

CapitaLand Integrated Commercial Trust Chart from 2022 till present

But, should we wait for interest rates to fall and the REITs market to recover to previous highs before we start investing in it?

The short answer is no. Conventionally, many investors like to wait till the coast is clear before they start investing. They tend to focus on the risk of losing money in challenging and uncertain environments.

However, if we truly grasp the concept of risk management, we will realise that the best time to accumulate assets in a prudent manner is when all the risks are already evident and priced into the financial markets. Oftentimes, we might be nearer to the bottom of the cycle than the top, with risk-to-reward tilting in favour for us.

Such “crisis” presents opportunities for investors to acquire quality assets at discounted prices. While we certainly can’t predict how long it takes for the recovery of the market, the ability to exercise discipline and patience to act on market opportunities will pave the way towards long-term financial success.

If you would like to capitalize on the undervalued S-REITs market and learn how you can build up your own REITs portfolio, join us in the upcoming session of Invest To Build Passive Income With Singapore REITs workshop.

In this workshop, we will guide you on applying a framework to cherry pick S-REITs to invest in and share how you can buy your selected S-REITs at reasonable prices. The workshop includes hands-on activities to help you immediately put your learning into practice. You may find out more details on the workshop and save your seat using the link below.

Sign-up here👉 bit.ly/reitsworkshop

$LION-PHILLIP S-REIT(CLR.SI)$ $CapLand Ascendas REIT(A17U.SI)$ $Mapletree Ind Tr(ME8U.SI)$

@TigerStars