Top 3 Singapore REITs to Consider Now

Once a favorite asset class among investors, real estate investment trusts (REITs) have fallen in popularity due to aggressive interest rate hikes by central banks in 2022-23.

These increases have increased the cost of borrowing for REITs, putting additional pressure on them on top of higher operating costs due to inflation.

Despite these challenges, Frasers Centrepoint Foundation (SGX:J69U), Mapletree Pan Asia Commercial Trust (SGX:N2IU) and ParkwayLife REIT (SGX:C2PU) showed commendable performance.

Given this negative sentiment, well-run REITs can prove to be an attractive opportunity for investors seeking long-term income.

Frasers Centrepoint Trust (FCT): A Resilient Singaporean Retail REIT

FCT is a leading owner of suburban shopping malls in Singapore.

Shopping malls are conveniently located close to homes and have easy access to public transportation, which makes their retail space in high demand.

Source: FCT Annual Reports

Real estate spending rose by 10% between 2021 and 2023, while finance costs rose by 76% during the period, the data showed.

However, this increase was mitigated by solid business activity, resulting in a minimal change in distribution per unit (DPU).

In its latest H1 2024 earnings report, FCT boasted a high occupancy rate of 99.9% and an average positive rental yield of 7.5%. Meanwhile, shopper traffic and tenant sales also increased year-on-year (YOY) during the quarter.

Given that finance costs are unlikely to increase significantly further and demand for retail space remains high, FCT has a good chance of maintaining its DPU ratio.

Mapletree Pan Asia Commercial Trust (MPACT): Overcoming Challenges and Emerging Stronger

MPACT was formed in 2022 through the merger of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust.

The merger of these two REITs coincided with a period of aggressive interest rate increases.

As a result, the total leverage ratio of the newly established REIT increased from 33.8% as of June 30, 2022 to over 40% as of September 30, 2022.

Combined with higher borrowing costs, financial costs in fiscal year 2023/24 (FY 2023/24) increased by 39% year-on-year.

In addition, the stronger Singapore dollar against foreign currencies during the period contributed to a 7.3% year-on-year decline in DPU.

Despite these headwinds, there are positive signs that point to a bright future for MPACT.

High occupancy and rental returns: As of 31 March 2024, the portfolio maintains a healthy occupancy rate of 96.1%. Driven by strong demand for Singapore properties, the average rental yield for FY2023/24 was positive at 2.9%.
Improving the activities for the Christmas March: MPACT’s Festive Walk property has been struggling with negative rent returns. However, the Hong Kong property is showing signs of rent stabilization. Notably, its net property income (NPI) is up about 40% year-on-year.
Potentially reduced financial costs: The announced sale of Mapletree Anson (scheduled to complete in July 2024) is expected to reduce the company’s total debt to 37.6% on a pro forma basis.

MPACT has navigated a challenging operating environment over the past two years and appears well-positioned to improve its performance in the future.

ParkwayLife REIT (PLife REIT): A Healthcare Leader with a Growing History

Last year was the 16th consecutive year that PLife REIT increased its underlying DPU since listing.

Photo Source: PLife REIT Annual Report 2023

This impressive achievement was achieved thanks to strong cooperation with the sponsor IHH Healthcare Berhad (SGX:Q0F) and a sound management strategy.

For its Singapore portfolio of Mount Elizabeth Hospital Property, Gleneagles Hospital Property and Parkway East Hospital Property, PLife REIT has extended its head lease agreement with IHH in 2022.

The agreement guarantees rent increases from 2022 to 2025, followed by an annual rent adjustment that will apply to the remaining term of the lease until 2042.

Given that the Singapore portfolio accounts for around 70% of total NPI, this deal provides a steady stream of rental income over the long term.

Still, PLife was not immune to rising borrowing costs and currency fluctuations.

While the cost of debt remains low at 1.3%, it has more than doubled since 2021.

Meanwhile, the Japanese yen (JPY) has also depreciated significantly against the Singapore dollar over the past two years.

This will impact rental income from properties in Japan.

PLife’s proactive capital management has mitigated the impact. The REIT has no immediate debt refinancing needs until March 2025, and approximately 91% of its interest rate exposure is hedged.

In addition, JPY net income hedges were implemented until Q1 2029. These hedges allowed PLife to increase its DPU in Q1 2024 by 4.0%, despite the year-on-year decline in gross revenue and NPI in the quarter.

With a favourable rental structure across its Singapore portfolio, a first-mover advantage in the Japanese senior care market and prudent capital management, PLife is positioned to sustain a rising DPU.

Get Smart: A Look into the Future

While bonds provide some protection in today’s economic climate, investors may want to consider adding well-run REITs as a strategic long-term investment, as REITs have the potential to outperform bonds over time.

By investing in these reliable REITs now, you are setting yourself up to benefit from a stream of growing passive income thanks to increasing distribution per unit (DPU).

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Disclosure: Chan Kin Chuah owns shares in Frasers Centrepoint Trust, Mapletree Pan Asia Commercial Trust and ParkwayLife REIT.

The article Unlock Your Future Income: 3 Top Singapore REITs to Consider Now appeared first on The Smart Investor.