A Hard Look At The Maturing SReit Market
This post was written for www.hnworth.com, a site targeting high net worth individuals in Singapore.
Have fun reading !
There is a new SReit coming to town but do not worry because I am not in the habit of writing sales pitches, and we have enough analysts reports out there to keep dozens of folks gainfully employed even if IPOs in Singapore have been non existent this year such that the recent Singapore O&G IPO has returned 164% in a quick rally for us to remember and then quickly forget.
The Manulife US Reit will be the largest IPO we WILL NOT BE SEEING (as it was called off yesterday morning after this was written) since the Accordia Golf Trust priced in Jul 2014, comprising of non Singapore real estate which is good because it is then exempt from the stamp duties involved in acquiring Singapore real estate and true to the intention as of the 2015 Budget.
Reits typically exist for mature real estate markets, the Heavens forbid if China decides to “reit” their real estate at their 55% market volatility levels and the continuous State interference that sometimes happen more than twice a day.
We know our Reit market is maturing because there are new rules now to change gearing limits and increase the development limits so that managers can enhance their stable of properties to improve on yields. Additional disclosure on fees also prevent Reits from disadvantaging the minority stakeholders especially for those Reits that used to be part of personal real estate portfolios.
SReits have not had a good year so far, quite flattish in their price action but compares favourably against the STI Index which is down for the year and I think it is a remarkable feat indeed given that our interest rates have bucked global trends, going higher.
It is not an easy task to compare SReits with the rest of the world because there are just too many differences in cross borders accounting rules, mainly in asset depreciation and such.
Japan probably has the safest Reit market because their Reits are required to pay down their principal and interest annually which is an ultra conservative measure that protects the investor/shareholder against asset devaluation in times of crisis.
Singapore Reits, in contrast, do not have the debt pay down requirement and are only required to service interest payments which will leave them exposed even if their Loan to Valuation ratio is now limited at 45% much like the Australian Reit market which suffered heavy losses (>40%) during the Lehman crisis due to the collapse of their NAV and most of them were running on negative equity during that period, surviving on rights issues ransoms on stakeholders.
So how do SReits fare against the global US$ 12 trillion reit market, year to date ?
Surprisingly well on price returns, with dividends ranked amongst the highest in the world, beating high yield countries like Australia. Note that I threw in some real estate indices for good measure.