The market for Singapore Real Estate Investment Trusts (S-REITs) has been experiencing some turbulence in 2024 due to the ongoing high-interest rate environment. This has led to a generally cautious sentiment among investors.
Despite the challenges, Singapore-based S-REITs with significant retail assets have shown remarkable resilience, particularly supported by the recovery in tourism and recent asset enhancement initiatives (AEIs). These REITs have managed to maintain high occupancy rates and positive rent reversions, presenting attractive investment opportunities amid the current economic climate.
In this article, we look at some key takeaways from current market dynamics, investment opportunities, and potential risks for investors looking to invest in this sector.
5 Key Takeaways
- Tourism Recovery Boost: The rebound in tourism has been a significant driver for retail S-REITs, resulting in increased shopper traffic and tenant sales.
- Positive Rent Reversions: Positive rent reversions across various S-REITs suggest strong leasing demand and the ability to negotiate higher rental rates.
- High Occupancy Rates: Most S-REITs maintain high occupancy rates, reflecting the attractiveness and competitiveness of their retail spaces.
- Asset Enhancement Initiatives (AEIs): Recent AEIs have enhanced the appeal of retail properties, contributing to improved operational performance.
- Diverse Portfolio Performances: Different S-REITs are showing varied financial performances, influenced by their specific strategies and property portfolios.
5 Investment Opportunities in Singapore-Based S-REITs
1. CapitaLand Integrated Commercial Trust (CICT) (SGX: C38U)
CICT has demonstrated resilience with improved Q1 2024 gross revenue and net property income (NPI) for its retail assets. The trust has seen a 3.6% year-on-year (yoy) growth in shopper traffic and a 2.1% yoy increase in tenant sales. Downtown malls have been the primary drivers of this growth, while suburban malls continue to benefit from robust food and beverage demand. With a committed retail occupancy rate rising to 98.7%, CICT’s strong performance and consistent rent reversion above 7% make it an attractive investment.
2. Mapletree Pan Asia Commercial Trust (MPACT) (SGX: N2IU)
MPACT’s VivoCity has been a standout performer, achieving a 100% occupancy rate as of March 31, 2024, and recording a 14% positive rent reversion. The completion of its sixth AEI in May 2023, which added over 80,000 square feet of reconfigured retail space, has significantly enhanced its appeal. The AEI yielded a return on investment of over 20%, based on stabilized revenue and capital expenditure of approximately S$10 million. VivoCity also set a new record for full-year tenant sales, nearly reaching S$1.1 billion.
3. Frasers Centrepoint Trust (FCT) (SGX: J69U)
Despite a decline in gross revenue and NPI in H1 2024 due to the divestment of Changi City Point and ongoing AEI at Tampines 1, FCT’s underlying performance remains strong. Excluding these factors, gross revenue and NPI increased by 2.9% and 2.1%, respectively. FCT’s retail portfolio boasts a committed occupancy rate of 99.9% as of March 31, 2024, and has seen an 8.1% and 4.3% yoy growth in shopper traffic and tenant sales, respectively. With a positive rent reversion of 7.5%, FCT remains a solid investment choice.
4. Lendlease Global Commercial Reit (SGX: JYEU)
Lendlease Reit’s retail portfolio has surpassed pre-COVID levels in tenant sales and shopper traffic. The average committed occupancy rate for its key malls, JEM and 313@somerset, stood at 99.4% as of March 31, 2024. Tenant sales increased by 2.6% and shopper traffic improved by 6.1% yoy in Q3 2024. These robust operational metrics, coupled with strategic locations, position Lendlease Reit as a strong contender in the retail S-REIT space.
5. Suntec Reit (SGX: T82U)
Suntec Reit has shown consistent growth with a 3% yoy increase in gross revenue and a 1.3% rise in NPI for Q1 2024. Suntec City mall, a key asset, has registered positive rent reversion for eight consecutive quarters, with a 21.7% increase in Q1 2024. The mall also reported a 5% yoy improvement in both tenant sales and shopper traffic. Given its strong rent reversion trends and stable retail sales outlook, Suntec Reit offers attractive investment prospects.
5 Key Risks to Watch Out For
- Interest Rate Volatility: Rising interest rates pose a significant risk to S-REITs, as they can increase borrowing costs and reduce distributable income. Higher interest expenses can also impact the ability of S-REITs to finance new acquisitions or undertake asset enhancement initiatives, potentially slowing growth.
- Economic Downturns: An economic downturn could negatively affect consumer spending, leading to lower tenant sales and higher vacancy rates. Retail S-REITs are particularly vulnerable to fluctuations in consumer confidence and spending habits, which can impact the performance of their retail properties.
- Operational Costs: Increasing operational costs, including maintenance, utilities, and AEI expenses, can pressure profit margins. S-REITs must carefully manage these costs to maintain profitability, especially in a high-interest rate environment where revenue growth may be more challenging.
- Tenant Retention: Maintaining high occupancy rates is critical for S-REITs, but retaining tenants can be challenging amid changing market dynamics and increasing competition. The ability to negotiate favorable lease terms and keep tenants satisfied is essential for sustaining rental income and occupancy rates.
- Regulatory Changes: Changes in regulatory policies affecting real estate and investment trusts could pose risks to S-REITs’ operational and financial strategies. Regulatory adjustments, such as changes in tax laws, zoning regulations, or environmental standards, can impact the cost structure and operational flexibility of S-REITs.
Conclusion: Opportunities Amid Challenges
Despite the weaker sentiment in the market due to high interest rates, Singapore-based S-REITs present notable opportunities for investors willing to navigate the current landscape. By focusing on S-REITs with robust operational metrics, positive rent reversions, and high occupancy rates, investors can potentially capitalize on the sector’s underlying strengths. However, staying vigilant about the risks is essential to make informed investment decisions in this volatile environment.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of the company mentioned.
