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Five Minute Focus: The REIT landscape in Singapore

Since the listing of the first Singapore Real Estate Investment Trust (S-REIT) in 2002, the industry has undergone significant growth with a market capitalization now close to USD 80 billion.1 While S-REITs' year-to-date 2018 performance has dipped nearly 9.5 percent, annualized returns over a 10-year period have been strong, delivering gains in excess of 7.0 percent to investors.2

RBC Investor & Treasury Services' Hong Paterson, Country Head and Managing Director, Global Client Coverage for Singapore, shares her insights into some of the key trends currently underway in the S-REIT industry, and the potential market impact of Singapore's Variable Capital Company (VCC) fund structure roll-out in 2019.

1.  What is the state of the S-REIT market today?

Despite the recent challenges facing S-REITs, they have enjoyed stable and consistent returns over the last few years, generating performance which is broadly uncorrelated to equities and other market drivers. The sector was left fairly unscathed by a number of recent geopolitical and macroeconomic developments such as the 2013 Taper Tantrum, Chinese equity market volatility in 2015 and 2016, and the ongoing inflationary concerns following the US election.3

The asset class has a number of fixed-income characteristics, as it provides investors with a regular income stream derived from rental cash flows.4 S-REITs are appealing to investors looking for stable returns as well as capital appreciation, particularly as traditional asset managers have found it tough to produce returns. The investor interest in the asset class is evidenced in the flows, which have helped turn the S-REIT market into one of the region's largest REIT markets, just behind Australia.

One interesting dynamic, which could further accelerate flows into the burgeoning domestic industry, has been the growth of exchange-traded funds (ETFs) offering exposures to baskets of S-REITs, thereby giving investors access—at a significantly lower cost—to real estate located in both Singapore, and the Asia-Pacific region more generally.5 Lion Global Investors, for example, launched its Lion-Phillip S-REIT ETF in October 2017, providing investors with access to S-REITs screened by Morningstar,6 and has accumulated approximately CAD 128 million as of October 31, 2018.7

2.  What type of investors are purchasing S-REITs?

While S-REITs are publicly listed and available to retail investors, most of the capital allocations have been made by institutional clients, many of whom want exposure to the real economy. The most enthusiastic buyers of S-REITs are small to mid-sized institutions, as they do not have the resources and real estate expertise which larger organizations are endowed with. In contrast, sizeable institutions—such as major pension funds—will typically invest directly into real estate as an owner-operator or through a co-investment vehicle.

3.  What are S-REITs investing in right now?

Most S-REITs invest in Singaporean or regional real estate—especially in Australia—comprising a diverse range of property types. As more businesses invest in technological innovations such as artificial intelligence, and look to protect themselves against cyber-criminals, secure data centres and innovation labs are springing up, which S-REITs have identified as a growing sector for potential investment.

As Singapore is a small country, there is only a finite amount of real estate for these organizations to invest in, which is prompting some S-REITs to internationalize their presence and build up exposures outside of the local markets to achieve better diversification.

S-REITs have identified abundant commercial opportunities in Europe and North America due to current geopolitical uncertainties. The UK's withdrawal from the European Union (EU) may have also created opportunities for REITs more broadly as a number of UK financial institutions are strengthening their presence in the EU. For example, there is a significant amount of office construction underway in Dublin and Luxembourg, and both domiciles are being closely monitored by REITs for opportunities in various property types as these economies grow.

4.  How will the VCC impact the S-REIT?

Legislation introducing the VCC fund structure was passed in October 2018. It is expected to come into force in 2019, and will be available to managers operating both open-end and closed-end fund structures, including real estate. The VCC has generated interest among market participants, but it is not seen as a direct competitor or rival to the S-REIT, partly because the former is more diverse and open to a wider range of managers covering multiple strategies and asset classes, whereas the latter is focused purely on real estate.

Generally, however, the underlying strategies and sources for fund raising determine whether a manager would opt for using a VCC or a REIT. Given the growth of Singapore as both a fund raising and investment hub in Asia, there is capacity for these complementary products to co-exist.

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Sources

  1. SGX (October 18, 2018) 2018 September Quarter S-REITs Earnings Schedule
  2. S&P Dow Jones Indices S&P Singapore REIT (SGD)
  3. RBC I&TS (January 29, 2018) Singapore takes the REIT way
  4. Ibid.
  5. Ibid.
  6. Ibid.
  7. Lion Global Investors (October 31, 2018) Lion-Phillip S-REIT ETF