Do REITs even have moat? This is a question that some may raise.
I believe they do. There’s a saying that property is about location, location and location. A property in a highly desirable location enables the REIT to demand premium rentals. Furthermore, it is impossible to have two identical properties occupying the same location, which adds a sense of uniqueness.
However, I must acknowledge that while REITs may possess location moats, they are not particularly strong, especially considering the ongoing shift from a physical to a digital economy. The importance of location and the premium associated with it may diminish. For instance, the rise of remote work has reduced the demand for prime CBD office spaces worldwide, rendering competition for such real estate less intense today.
There are over 40 REITs listed on the SGX and I have filtered down to just four that had a moat rating by Morningstar. (I had shared blue chip stocks with moats previously.)
Let us examine their moats.
4 Singapore REITs with Moats
#1 CapitaLand Integrated Commercial Trust (C38U)
CapitaLand Integrated Commercial Trust (CICT) is Singapore’s largest retail and CBD office landlord in Singapore.
When it comes to office assets, the majority of CICT’s portfolio is situated in the central business district (CBD). Together with its Sponsor, CapitaLand, CICT stands as the largest landlord of office buildings in the Singapore CBD. Collectively, they exercise control over 20% of the Grade A CBD supply.
These prime office spaces are strategically located at the heart of Singapore, boasting prestigious addresses along Shenton Way and Robinson Road. The appeal of this area lies in its ability to provide businesses with a desirable image and an opportunity to impress clients.
Despite CICT charging rents at the higher end of the market, it has been successful in maintaining a high tenant retention rate of 70%. This indicates that CICT’s assets are highly regarded by tenants due to their favorable location and quality, which justifies their willingness to pay premium rents for the space.
Looking ahead, the upcoming supply of CBD office spaces is expected to average around 0.9 million square feet per year in the next three years, slightly higher than the average of 0.6 million square feet per year over the past decade. However, the main risk lies not in the supply but rather in the demand. The work-from-home culture has become permanent in some companies, prompting management to reconsider their office space requirements.
Despite this, Singapore’s occupancy rate remains high, surpassing 90%, whereas many other developed markets, such as the US, have experienced a decline in occupancy to 80%. Singapore, benefiting from its size constraints, holds an advantage in maintaining demand stability, which is likely to be less affected.
Regarding retail assets, CICT possesses a combination of suburban and downtown properties. Its suburban assets are strategically located in densely populated residential areas, while its downtown retail properties occupy highly sought-after shopping and tourist destinations. All of these retail assets are conveniently situated on or near major MRT stations and transportation hubs, ensuring a substantial flow of commuter traffic. Consequently, the malls enjoy consistent footfall from shoppers, leading to strong leasing demand for retail space within these establishments.
These retail properties are typically situated on prime plots directly above or adjacent to major MRT stations or bus interchanges. Once a building is constructed on such a plot, there is no second plot that can match its prime location.
CICT’s downtown properties are strategically situated in renowned tourist shopping destinations, including:
- Orchard Road (Plaza Singapura),
- Bugis (Bugis Junction, Bugis+),
- City Hall (Raffles City, Funan),
- and Clarke Quay.
Consequently, these properties are more sensitive to fluctuations in tourist numbers and are expected to experience improved performance during the current stage of Covid recovery.
The suburban malls also benefit from being directly connected to the MRT stations, forming a crucial part of the daily commute for many individuals. This accessibility ensures that commuters have a significantly higher likelihood of entering these malls to purchase dinner or daily necessities, given the convenience factor.
Some may raise concerns about the threat of ecommerce, but in Singapore, these concerns are somewhat mitigated due to the close proximity of malls to residential areas. The convenience and speed of walking a short distance to purchase necessities often surpasses the need of ecommerce delivery. However, items that are not immediate necessities and allow customers to be more price-sensitive, such as computer accessories and fashion, may face greater competition from ecommerce platforms. As such, food and beverage outlets and supermarkets are likely to maintain their relevance. This shift in consumer behavior is already evident among CICT’s mall tenants, accounting for over 40% of the gross rental income.
Moreover, CICT has taken proactive measures to redevelop Funan into Singapore’s first O&O (online and offline) shopping mall. This redevelopment includes the integration of infrastructure such as a 24-hour click-and-collect drive-through, aimed at assisting tenants in boosting sales both online and offline. If successful, CICT may extend this model to more malls, enhancing its value proposition for tenants and potentially further improving retention rates.
CICT was also mentioned in my list of high-quality REITs with rising dividends.
#2 Frasers Centrepoint Trust (J69U)
Frasers Centrepoint Trust (FCT) is a dedicated retail mall in Singapore, primarily focused on serving suburban areas. Similar to CICT’s suburban malls, FCT’s retail assets are strategically located in densely populated residential areas, either directly on or adjacent to major MRT stations and transport hubs. These locations generate a significant volume of commuter traffic, resulting in consistent footfall for the malls’ tenants and driving leasing demand for their retail spaces.
It is widely recognized that Singapore is a small and densely developed country, leaving limited space for the construction of new malls that could compete with FCT’s prime locations. The high cost of land further amplifies the risks associated with diverting shopper traffic away from FCT malls. These considerations serve as deterrents for developers who would instead seek out untapped locations that do not already have a mall.
However, there is one exception to this trend – the upcoming Pasir Ris Mall, scheduled for completion in 2024. It is expected to be the largest mall built in Singapore over the next three years and will directly compete with FCT’s White Sands mall. Nevertheless, this competition may pose less of a concern as Pasir Ris Mall itself includes 500 residential units, and approximately 1,100 new HDB units are being constructed in the vicinity. The increased residential population is likely to mitigate the potential impact of competition. Apart from this development, the remaining malls in new areas tend to be smaller and may not be located in close proximity to MRT stations. As a result, FCT faces minimal competition and is expected to maintain its dominant position in the areas where it currently operates.
To further illustrate FCT’s moat, the company has consistently been able to command premium rents compared to the average market rates. This is evident from the fact that rental rates have increased by an average of 7% for lease renewals since fiscal year 2010. This indicates that tenants recognize the value and desirability of FCT’s properties.
#3 Keppel DC REIT (AJBU)
Data centers play a critical role in supporting our digital economy, and investors are increasingly recognizing the value of owning the real estate that houses the growing number of servers.
Constructing and operating data centers requires specialized knowledge and a deep understanding of the industry and customer requirements. These facilities must meet stringent technical specifications, including the implementation of redundant power and cooling systems to ensure the necessary backup and resilience for data center users.
Selecting suitable sites for data center construction presents unique challenges compared to other types of real estate. Factors such as access to a reliable and ample supply of high-voltage electrical power and proximity to international network routes must be carefully considered.
Singapore currently has over 70 operational data centers, and Keppel DC REIT owns six of them. These data centers are strategically located in industrial areas, which facilitates the availability of high-power distribution required for their operations.
Keppel DC REIT also operates data centers overseas, but it may not possess the same level of competitive advantage in those locations compared to Singapore due to the lesser degree of land scarcity.
In Singapore, Keppel DC REIT enjoys a favorable position in the market. Over the past three years, the Singapore government has implemented a moratorium, temporarily prohibiting the construction of new data centers. Although the moratorium has now been lifted, there are expected to be limitations in place, such as a cap on the total capacity of data centers that can be built per year. This is due to the scarcity of land in Singapore and the energy demands associated with data centers, which currently account for approximately 7% of the country’s total energy consumption.
Therefore, given the limited availability of new data centers, Keppel DC REIT’s existing data centers are likely to continue experiencing strong demand. The REIT currently boasts a high occupancy rate of 98.5% and an average lease expiry of 8.2 years. Customers who prioritize Singapore as a data center location due to its political stability, absence of natural disasters, and reliable power supply have limited alternatives to choose from. Furthermore, the substantial financial investment involved in data center equipment and the growing risks associated with potential downtime make it highly unlikely for tenants to switch to competitors.
#4 ParkwayLife REIT (C2PU)
In my perspective, ParkwayLife REIT does possess a moat, and here’s why:
Hospitals are specialized real estate properties with unique requirements. Designing a hospital involves considering numerous factors such as patient flow, efficient circulation paths, infection control measures, accessibility for patients with disabilities, adequate electrical infrastructure for medical devices, equipment access, and interference shielding. Not every developer has the expertise to construct a hospital, and the decision to build one is not taken lightly due to the substantial costs and extensive planning involved. Additionally, hospitals require government approvals and must align with the government’s healthcare plans. Once established, hospitals tend to have long lifespans spanning several decades due to the significant investment required for construction and the rising healthcare demand from an aging population. It is rare to see a hospital closure in Singapore, as relocation or expansion is usually the common approach.
In Singapore, there are eight private hospitals (excluding Mt Alvernia, which is a non-profit organization), and ParkwayLife REIT owns three of them – Gleneagles, Mount Elizabeth, and Parkway East. Notably, Gleneagles and Mount Elizabeth have earned spots among the world’s top 250 hospitals according to Newsweek. These hospitals have established themselves as renowned healthcare institutions in the region, attracting a significant number of overseas patients seeking top-quality medical treatment in Singapore. The brand names and reputation associated with these hospitals, recognized for their excellence and expertise in healthcare, serve as a moat. Starting a new hospital and immediately achieving such a level of recognition and trust is challenging, further enhancing ParkwayLife REIT’s competitive advantage in the market.
In FY2022, the three private hospitals owned by ParkwayLife REIT accounted for 65.3% of the REIT’s total revenue. This significant revenue contribution highlights the hospitals’ ability to command premium rentals, indicating the presence of a potential moat. On the other hand, the remaining revenue mainly comes from nursing homes in Japan, which, in my opinion, do not possess a moat due to the presence of numerous competitors in the market.
ParkwayLife REIT stands out with an average lease expiry of over 20 years, which is notably longer than other REITs. This extended lease duration is primarily a result of the high-cost structure and specialized operations required for running hospitals. In this case, the REIT’s sponsor, IHH Healthcare, serves as the lessee and operator of these hospitals, highlighting an alignment of interests.
Notably, ParkwayLife REIT has demonstrated consistent dividend growth since its listing, overcoming challenging periods such as the Great Financial Crisis in 2008 and the Covid-19 pandemic in 2020. This track record of resilience and sustained dividend growth serves as an additional indicator of a potentially moaty business.
Their Moat continue to provide competitive edge for these 4 S-REITs
In conclusion, the four Singapore REITs – CICT, FCT, Keppel DC, and ParkwayLife – demonstrate strong indications of possessing moats in their respective sectors.
CICT, as the largest retail and CBD office landlord in Singapore, benefits from its strategic locations in the central business district and popular retail destinations. The scarcity of prime locations contribute to its moat.
FCT, a dedicated suburban retail mall REIT, enjoys a competitive advantage through its well-positioned malls in densely populated residential areas. The limited availability of new mall developments and the convenience factor of being near major transport hubs contribute to its moat.
Keppel DC REIT, with its focus on data centers, capitalizes on the increasing demand for server space and the specialized knowledge required for construction and operation. Limited land availability and the high barriers to entry in the data center industry contribute to its moat.
ParkwayLife REIT, with its portfolio of specialized hospitals, benefits from the unique requirements and high cost structure associated with healthcare properties. The established reputation of its hospitals help anchor its moat in the healthcare real estate sector.
Investors seeking exposure to Singapore’s real estate market can find potential value in these REITs, as their moats provide a competitive edge and long-term prospects for sustainable growth.