• Around half of S-REITs have reported their quarterly earnings so far, with DPU growth and healthy occupancy rate a common theme. While some REITs were cautiously optimistic amidst Omicron, potential green-shoots were seen in the retail and office sub-segments.
   
• The sector is now c. 10% off the last high seen in Jan ’21 as expectations of a rate hike grow. Past peak/trough sector price performances showed average historical trough-to-peak of +31.8% with average peak-to-trough at -18.6%. Apart from interest rates, other sector drivers include fundamentals such as economic recovery and balance sheet strengths.
   
• Sector yield spread of c.400bps is at the 10-year historical mean as dividend yields have increased in tandem with risk-free rate in the past 12 months.

S-REITs Quarterly Earnings Update – DPU Growth and Healthy Occupancy Rate a Common Theme

Of the 24 S-REITs that have reported their quarterly updates thus far (as of 7 Feb), a common theme was growth in DPUs and stable overall portfolio occupancy. Notably, REITs with significant exposure to local office assets have pointed to improving office rental and occupancy rates, with a sanguine outlook for the sub-segment as they look forward to economic recovery and income contribution.

A Look at S-REITs Peak & Trough Over the Past 10 Years

In the past 10 years, the S-REIT sector has seen 11 peak/trough cycles (as highlighted in red in the table below), mostly corresponding with the U.S. rate hike cycles.

The sharpest trough-to-peak rally (+56.1% price performance) was seen in Dec ’11 to Apr ’13 as the sector saw strong growth amidst a benign interest rate environment. Conversely, the sharpest but short peak-to-trough (-37.9%) was observed at the initial stage of the pandemic and related lockdowns, where the STI also declined by about 31%. The average of the historical trough-to-peak stands at +31.8% while the average peak-to-trough is at -18.6%.

The sector is now c.10.2% lower than the last high seen in January 2021 amidst the backdrop of increasing expectations of a potential rate hike. Although interest rates may be a driver for the sector, S-REITs currently have an average gearing ratio of about 37-38%, which is well below the 50% cap.

While global REITs have declined c.8% YTD amidst the outlook for increased borrowing costs, global banks on the reverse have gained c.7% with Singapore banks leading local market gains with an average +10% as detailed here.

Yield Spread of c.400bps at 10-Year Historical Average

S-REITs yield spread (difference between risk-free rate and sector dividend yield) stands at c.400bps and at the average level for the past 10 years. Although risk-free rate (i.e. SG 10Y benchmark gov’t bond yield) has risen 44bps in the past 12 months, S-REITs sector dividend yield has also increased by the same rate.

While interest rates gyration may potentially narrow the yield spread, fundamentals such as macro recovery/economy re-openings may also have a positive impact on dividend yields.

Total Returns of +6.2% in 2021 Driven by Retail Flows

The FTSE All-Share REIT Index posted total returns of +5.4% in 2021, reversing from the negative returns in 2020. The sector was led by Healthcare REITs (+35.8%), Office REITs (+10.1%) and Retail REITs (+9.6%). Retail investors drove S-REITs fund flow activities with over S$1 billion of net retail inflows while institutions net outflow stood at over S$800 million.