Singapore's listed REITs: an introduction

With a market capitalization of approximately SGD 800 billion (USD 595 billion) Singapore's stock exchange (SGX) is not among the world's largest. Indeed, within the MSCI (Developed Markets) World Index Singapore falls in the 'Others' category, along with thirteen other countries. These fourteen countries share the Index's six percent exposure to 'Others.'

The SGX is a powerhouse for listed Asian REITs. Currently, there are 43 REITs and Property Trusts listed in Singapore. These forty three securities represent almost twelve percent of the local market's capitalization at SGD 95 billion (USD 71 billion). They are diversified across virtually all sectors, the important exception being residential REITs. These sectors include retail, industrial, hospitality, healthcare and office. Additionally, over 80 percent of these entities have exposure outside of Singapore's small domestic market.

However, any investor evaluating REITs now has a whole host of new factors to analyze. The dynamics of a REIT's business is not the same as it was in the pre-COVID-19 world. Several new trends have emerged while some existing ones have accelerated. Notable trends are the Work From Home (WFH) phenomena and the increased adoption of e-commerce delivery platforms for retail sales.

Source: Pexels.com

WFH, especially in the financial sector, will affect demand for commercial office space. That's a serious concern for Singapore given that Finance and Business Services combined are almost 30 percent of the Republic's GDP, 14 and 15 percent respectively in 2019. Even a casual stroll through Singapore's old Raffles Place and new Marina Bay financial districts will leave no observer in doubt about the amount of office space currently occupied by big name banks and financial institutions.

Singapore's largest bank DBS recently announced that four in five of its jobs can be conducted remotely without any problem. Additionally, the bank stated in future it will allow all staff members to work remotely for up to 40 percent of their time.

Not all banks may move as aggressively as DBS to embrace the new post pandemic workplace realities. Nonetheless, the writing is on the wall and there is no going back to the days of yesteryear. In other words, in the medium to long term demand for office space from banks and financial institutions can be expected to moderate (if not decline outright).

But is it really all doom and gloom for Singapore's office property sector? Not exactly.

Firstly, the pandemic has reinforced Singapore's efficiency as a reliable business hub. Even during the city's strictest Phase I, Circuit Breaker (aka lock down) finance, trade and logistics businesses operated at or near full efficiency. Notwithstanding the issues surrounding foreign workers, Singapore's public health response was vigorous though sufficiently calibrated to avoid the type of total shutdowns experienced by many other economies.

Secondly, Singapore will be a net beneficiary of digital growth businesses looking to grow in Asia. Singapore provides an ideal springboard for broader Asian expansion. Such companies will look closely at Singapore as a site for regional headquarters for a variety of reasons clearly explained by new tech darling Zoom in a statement highlighting their own such decision.

“Singapore is pro-business, ranks as one of the friendliest countries to set up a company, and continues to be a favorite for regional headquarters as it boasts exceptional talent, strong infrastructure, and is a perfect gateway for engaging the wider APAC region … We plan to immediately hire employees, leveraging Singapore’s highly-educated engineering talent pool. Our new R&D center and data center will play a critical role in Zoom’s continued international growth.”

- Velchamy Sankarlingam, President of Product and Engineering for Zoom.

Lastly, logistics and even manufacturing companies looking to diversify operating geographies after suffering supply chain disruptions will give Singapore a second look despite the city's high operating costs. After all, it's better to pay slightly more for some (or all) of your supplies than it is to stop manufacturing altogether due to unexpected supply chain disruptions. Stopping business activities entirely, even for a short period, has potentially severe unintended consequences with strategic partners, including reputation and reliability.

Apart from office REITs, SGX has a large number of commercial mall REITs. Prior to the onslaught of COVID-19, shopping malls in Singapore were already adjusting to a world with e-commerce. Several malls had undertaken asset enhancement initiatives to reinvent the entire mall experience. For example, Funan Mall, the city's signature IT mall popular among techies reopened after a three year upgrade in December 2019 with a reduced emphasis on traditional shops and more on 'lifestyle'. That project started well before e-commerce

came into the limelight due to lock downs, etc. Additionally, malls were grappling with the slow but steady disappearance of traditional universal department store anchor tenants which were already struggling with the arrival of online retail sales.

To put plainly, even prior to the COVID-19 pandemic Singapore's retail malls were in the midst of reinventing the mall business due to the emergence of e-commerce as a long term competitive threat. Not surprising in a country with an Internet penetration rate of 87 percent (2019) coupled with safe and reliable connectivity.

The growth of Singapore’s e-commerce market will be supported by the country’s excellent internet technology. Fixed internet connections are typically almost triple the speed of the global average, and the country enjoys highly reliable, secure information and communications technology infrastructure. These factors have promoted high internet (87 percent) and mobile penetration (75 percent) levels among citizens.

- 2019 Global Payments Trends Report - Singapore Country Insights, JP Morgan

Moreover, as travel and tourism recovers in the post pandemic world it may be expected that initially some categories of travelers will be cautious about their choice of destination. These travelers will evaluate not only the public healthcare systems but also the reputational reliability of the host / destination country in its management of the pandemic. At least to date, Singapore comes out as a winner on these metrics. Consequently, Singapore and its shopping malls will be significant beneficiaries as international business and leisure travel to the city-state recovers.

With dividend yields ranging between two and seven percent p.a. for most SGX listed REITs, they present an attractive investment opportunity especially for yield hungry investors. However, Singapore's listed REITs are a varied lot (see table with data from September 2020). Investors must evaluate the management and financial resilience of each individual REIT before investing. To be sure, Singapore's regulatory environment helps in ensuring a certain level of transparency and solvency within the sector. However, regulatory requirements generally only set the bare minimum of standards. Investors looking to invest in the entire sector have three ETFs to consider. All are listed on the Singapore Exchange but are relatively small in size with the largest having SGD 250 million (USD 188 million) in assets under management as at December 2020.

________________

Imran is a Singapore based Tour Guide with a special interest in arts and history. Imran has lived and worked in several countries during his past career as an international banker. He enjoys traveling, especially by train, as a way to feed his curiosity about the world and nurture his interest in photography. He is available on Instagram (@imranahmedsg); twitter (@grandmoofti) and can be contacted at imran.ahmed.sg@gmail.com