Singapore’s healthcare Real Estate Investment Trusts (REITs) have emerged as pillars of resilience in a landscape marred by economic uncertainties and market fluctuations. Notably, First REIT (SGX: AW9U) and ParkwayLife REIT (SGX: C2PU) have demonstrated exceptional performance, underlining the strength and potential of healthcare-related assets in the commercial real estate sector.
Here are some key takeaways and potential downside risks that investors should note.
Key takeaways:
- Resilient Performance Amid Broader Market Downturns: Despite the broader iEdge S-REIT Index experiencing a slight decline, healthcare S-REITs like Parkway Life REIT (PLife REIT) and First REIT have outpaced their peers, with PLife REIT leading the pack with an 8% gain in the month-to-date period (until 22 February 2024), followed by First REIT with a 2% increase. This resilience is largely attributed to the essential nature of healthcare services, which ensures steady demand and occupancy rates, even during economic downturns.
- Strategic Expansion and Diversification: Both REITs have been proactive in expanding their asset portfolios and diversifying into developed markets such as Japan and Singapore, which offer stable rental incomes and growth opportunities. First REIT’s 2.0 Growth Strategy focuses on shifting towards having more than 50% of its assets under management (AUM) from developed markets by FY2027, highlighting a forward-looking approach to growth and risk management. Meanwhile, PLife REIT’s focus on strengthening its presence in existing markets while exploring new ones for mid to long-term growth further solidifies its position in the sector.
- Robust Financial Health and Hedging Strategies: Financial prudence is evident in both REITs’ management strategies, with significant portions of their debt being fixed or hedged against interest rate fluctuations. PLife REIT’s high interest coverage ratio of 11.3 times and First REIT’s strategic increase in hedged debt to 87.2% showcase their commitment to maintaining financial stability and protecting investor returns.
Downside Risks:
- Interest Rate Sensitivity: While both REITs have hedged a significant portion of their interest rate exposure, the sector remains vulnerable to sudden spikes in interest rates, which could increase financing costs and pressure margins.
- Regulatory Changes: Changes in healthcare policies or regulations in Singapore or other key markets like Japan could impact operational costs, leasing dynamics, and overall profitability.
- Foreign exchange risks: With exposure to overseas assets, both First REIT and Plife REIT are exposed to foreign exchange risk. This is reflected in some of First REIT’s financial performance in FY2023 amidst the strength of the SGD and the weakness of the Indonesian Rupiah.
- Market Saturation and Competition: As the sector grows, increased competition and potential market saturation could affect the pricing power and occupancy rates of healthcare properties, particularly in highly developed markets.
Healthcare REIT offers a stable investment option
Singapore’s healthcare REITs offer a stable investment option in uncertain times, thanks to their focus on essential services, strategic expansion, and solid financial planning. However, like any investment, it is important to stay aware of potential risks and do your homework before diving in. These REITs are particularly appealing to those looking to invest in something that provides steady returns over time.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of the company mentioned.
